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What is the dividend?

May 13, 2021 by Laxman Sonale 1 Comment

Hello friends, in today’s article we see the what is the dividend? or the hullabaloo about dividends from chapter 7 of common stocks and uncommon profits book. in chapter 7 Philip A. Fisher explains what is the dividend and how they important for the small investor. If you want to dividend, then how much money you have to save in your bank account and how much money you have to put in your account.

Previous Chapter 6

What is the dividend?

There is one quote from Warren Buffett that says, ” I am 85% is ben graham and 15% Philip A. fisher” Because they follow benjamin graham as a mentor,

but after charlie Munger tells them to invest in a better company than an undervalued company, from that warren buffet follow the scuttlebutt method from this book.

Let’s start with chapter 7,

The author says, whenever a company that has been paying no dividend, or a small one decided to pay a substantial dividend.

the board of directors says the time has come to do something for shareholders. The company giving dividends to shareholders is doing good or without paying dividends a company can do better. for these two cases to happen let’s see

Two cases happen when a company retains earnings:

1 ) Shareholders get benefits from retained earnings when the company spends money on building a new plant and launching new products or developing assets.

2) Shareholders get no benefit from retained earnings: In this situation, three reasons may affect.

a) Management piles up cash and liquid assets far beyond the needs of a business to get a sense of confidence and security.

b) When Substandard management gets a sub-normal return on capital already in business and uses retained earnings to enlarge inefficient business to justify bigger salaries.

c) Earnings are vitally needed yet cannot increases shareholder value

for examples

A) Spending money on assets like A.C, If in your store there is no any A.C like instrument then customer go the competitor’s store. If you don’t spend money on this instrument, then they can’t increase the volume of business.

B) Other examples, is Depreciation expense this expense comes when the value of that machinery is in end, then you have to replace the whole machinery and equipment.

( After 10 years machine working capacity is over, then the price of that machine is going high in these 10 years, so the cost has to take from the retained earnings.)

If the company have opportunity to increase earnings while invest retained earnings or dividend. so the company doesn’t need to give a dividend to the shareholder.

the company doesn’t have to increase the yield of dividend instead that invest in somewhere to increase the value of that money.

There are some misconceptions about dividends, let’s see what is that

Misconceptions:

1 ) If a company has increased its earnings and does not raise dividends, it is said that This is favoring large stockholders at the expense of small ones because people think,

Their investment is big so dividends are also big but tax brackets also big. The Capital gain tax is minimum than the dividend income tax rate.

The authors say, ” If you give small shareholder dividend, firstly company give the dividend expense tax after shareholder give dividend income tax pay,

whatever the small tax bracket is and shareholder wants to invest that money in some other stocks, then you have to pay the trading cost.

So cutting money from this all stuff, you get very low in form of a dividend.”

The small investor does not get that much money, which affords the expense of his home, because their investment is small.

If the Investor does not needs a dividend for home expenses, then the company does not need to give a dividend, instead,

the company can do invest in another new opportunity to increase company value or stocks.

2) Dividend return is a factor of safety: (misconception)

Because company give high yield on dividend, then stocks not overprice or not fall

but studies show bad stock return give those stocks, that give high yield dividend or not a low dividend yield company.

The author recommends don’t buy these stocks of a company, that focus on the dividend yield. Which are difficult in the company.

Regularity and dependability of dividend:

The most important thing about retained earnings is their regularity and dependability.

The companies that have fixed retained earning policies enjoy a high p/E multiple.

According to policies is based on a fixed percentage of earnings to be returns and other remaining pay the dividend.

The dividend payout ratio, when increase, the company is sure by paying dividend company is capable to get benefit from the funds by using them,

we can and advantage of new opportunity and the new payout ratio is maintained while business is going slow downtrend.

Whatever the companies policy, that doesn’t matter, but that policy does not change, with the time, company get the permanent investor, those investor is happy with that policy.

If a policy is consistent, then retained earnings yield is ending.

if you want outstanding profit the don’t focus on the retained earnings.

the weird things about retained earings are that ” those people give less attention on a retained earning that people get the maximum retained earnings.”

5 to 10 years this time is the best dividend return give from low yield stocks, those his earnings retain and grow and they increase that many dividends then high yield stocks stay behind.

But remember the dividend policy is consistent if any company change his policy regularly is not attract the permanent dividend so this company stocks are too long range is not good.

Next Chapter

When to buy stocks of outstanding company

April 17, 2021 by Laxman Sonale 7 Comments

Hello friends, in today’s article we see when to buy stocks from common stocks and uncommon profits book. this chapter helps you to when to buy stocks of outstanding company. If you buy the stocks at right time then only then you make the maximum money, so that’s why buying time is very much important.

Previous Chapter 4

When to buy stocks:

Up to here, we know that how to make money in the stock market. the best way to make money in the stock market is to invest in an outstanding company. The outstanding company is found by Scuttlebutt Method and 15 points of outstanding company.

Now you found an outstanding company, and that have a good profits margin and have good growth in the future. So the question is here, which is a good time for this outstanding company to invest.

The author says, ” buying a right company and hold for the long term, then you get some profits in every time.”

But you need maximum profits, then you have to think some points and buy on right time stocks.

you have done the most difficult part, is finding an outstanding company, now give some more effort to time the outstanding company stocks. then you have to learn some principles of buying right time stocks.

The author says, ” If you buy outstanding company stocks before 1929, stocks market crash, then after 25 years form buying, you only get little profits. So there is buying stocks at right time is the most important thing.

Timing an outstanding company, the normal method is to collect lots of economic data and apply then and analyze general business forecast and see a good situation or bad situation of an outstanding company.

the author says, ” This looks good method but practically is not good because forecast result is not good for taking risk of life time-saving.”

The right way is to understand the growth stocks’ nature, then you get good stocks. An outstanding company is those are they stay forward in Industry and work on developing a new product by using new process techniques. So doing this company gets lots of expense and some years get minimum profits.

here, the author tries to say that to understand the cycle of business and their product, like some news is an outstanding company is doing some good product and then the price is going high of that stocks. And again news comes, the plant is operating successfully, then also stocks prices go high.

But when difficulties are coming then the operating cost of that plant is going high and profits going down, so people sell as fast as they buy those stocks, then stocks price is going down.

And finally plant is running smoothly, and a two-day going rally on stock prices, but in the next quarter sales and promotion cost minimizes the profits, and now news spread is management has blundered with the company, and stock prices are going low up to least years stocks price.

So this is the best time to buy in this company.

Once the extra sales efforts make the first plant to pay normal sales effort enough for the upcoming year to establish another plant for the company.

So now company know the difficulties of running smoothly plant so 2 to 5 plant running smoothly and it is easy to establish.

that time 5th plant is run an full speed that time company is very big, for to develop new cycle product without profits or stocks price fall.

let’s see the examples of three companies

1.Americal Cyanamid:

These company stocks are compared to other company stocks, trade-in low multiple of P/E.

So new management is come and doing cost-cutting with efficiently to run efficient and spend money of new plant with complex engineering and plant does not work on schedule, so this time is good to buy this company stocks.

In five years this company earnings increased by 70% and stocks returned 163% in their price. but the author sells this company stocks at 110% return on stock prices. Because other companies long-range outlook is better than this company and company chemical business is not improved as compared to other companies and company is trying to enter in the highly competitive textile business.

Which time is good to sell see in next chapter 6

The author says, his decision is good or bad also is only knows the future.

2.Food Machinery and chemical corporation

This Company in world war II, before that they make the different machinery for different business, but in world war II, they making guns, rifles,barud, etc.

This company is going in the chemical business and maintaining the cyclical tendency of the machinery business, and separate companies are acquired and no one interested to buy this company stocks, so this is right to buy this company stocks.

So Top management is ready to hiring other peoples and promoting internal employees. and also doing to fix the old plant problem and run them a better way. Incurred abnormal expenses for 1995 to 1957.

Finally chemical business runs good and profit increases and the P/E multiple is also improved. In some years this company gets a 102% gain in stock prices.

3.Company well-known for its excellent labor relations:

In this company the size is growing at which friction happened and the relation is going bad and one new product also fails, that’s why EPS and stocks prices are going down.

So this point 1, their stock is good for buying.

After that management made plans to correct this situation quickly. After some time another strike happens and the stocks prices again go down.

So this is point 2 when stock is good to buy.

If you buy the stock at point A, get the profits are up to 90% and if you buy stocks at point 2, you get 50% profits.

The authors say’s, ” there is not necessary to have a problem in a company and saying that time is good opportunity to buy.”

So there is another situation also, for example, A new plant expense is up to 10 million dollars.

When the plant is operating at full speed, an engineer checks that plant and they found some problem in that, and this problem is fixed by making a 1.5 million dollar expense i.e 15% more capital to increase output by 40%.

So no additional overhead because the plant is already in operation so the profit margin will increases.

So from this example, the common things are that the EPS is improved in coming years, but this increased price has not yet produced on upward more in the price of that company share.

Whenever this type of condition is coming, then that time is good to buy, and stocks are in buying range. if this situation is not then investors also make money in the long term by buying outstanding company but profit is little.

Suppose investors find out the outstanding company that is good on 15th points and a good time is also come to buy. Suppose in the company there are some temporary issues is going what investor do then do invest in all money in that stocks by ignoring the business cycle?

If you buy stock and depression is coming and 40 to 50% of the stock falls from your buying peak.

So in this situation happen two case

Suppose investors already have some fairly substantial gains, from their previous investments, so this investor can ignore this problem in stocks and guesses of the business cycle and quickly invest by provided not craziness like 1928-29. so this has two advantages of doing this: a) investor is making be on somethings he knows, rather than something which is largely a guess. The company business is improved by talking to people but the business cycle forecast is only a guess, or if the market is down if they invest in that company. b) company is about have an increase in earning so these stocks fall less than other.
In this second case, the investor doesn’t have substantial gains from previous investments or is new to this game. this type of investor can buy appropriate investment asap and stagger the timing of further buying and allow several years still final part of funds are invested. This has some advantage of a) If the market does not decline, then they have good profits from that investment and become the case-1 investor. B) If the market decline during this period, the investor still has funds to take advantage of the decline and use it to buy other stocks. c)If a market decline happens, after the final part of your funds of investment, the gains on earlier purchases would largely offset the decline on more recent ones.

From the all above reason to invest all money, instead that invest slowly for several years is better.

Read More: One Up On Wall Street book