Sunday, January 17, 2010

Common Stocks And Uncommon Profits: Chapter 7

Warren Buffett has called himself "85% Graham and 15% Fisher". While the works of Graham are often cited, Fisher's book "Common Stocks and Uncommon Profits" is not. Here follows a summary of this work by Philip Fisher, known as one of the greatest investors of all time.

In this chapter, Fisher discusses whether dividends are important in stock selection. Fisher believes the public's thinking to be a little twisted and contain a number of half-truths when confronting the topic of dividends.

If managements are building up excess liquidity or generate sub-optimal returns on investment, Fisher absolutely believes that shareholders are better off if dividends are paid. However, the focus of the book has been on investing in the type of company that is generating excellent returns and with competent management; therefore, for the companies under consideration, these would not be issues.

Continuing with the assumption that this discussion is meant for holders of stocks which pass the 15 items listed in Chapter 3, for investors who are currently net buyers of common stock, Fisher finds it bewildering that they would find the idea of a dividend appealing. Presumably, they have invested in a great company, so it is strange that they would be willing to pay a tax, and then re-invest the lower proceeds, whether with the same company or elsewhere. Even pension funds, who do not pay tax, have to pay for the effort and transaction costs of investing the proceeds, when the funds could be utilized by the company with high rates of return.

Fisher recommends that management pay out a percentage of earnings, and stick to that, slowly and consistently raising it as earnings increase. In that way, they will attract the investors that are interested in that dividend rate and who can count on the income they require. For investors, however, Fisher believes that the dividend policy should be the least of their concerns.

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