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View Diary: Rush Limbaugh's downward spiral promises to accelerate (173 comments)

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  •  I still do not grok (2+ / 0-)
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    elwior, kaliope

    When a company with a single factory pays a 5% dividend it is doling out the profit it made from the production from that factory. The company still owns 100% of the factory. It did not sell off 5% of its self. The factory is still there the day after the dividend payment as presumably is capable of generating the same amount of production in the upcoming year. All else being equal, investors can expect the same dividend next year. So why would the cost of investment go down? The more successful a company is, the less it costs to invest in that company? I do not grok.

    •  dividend and stock price (11+ / 0-)

      I don't think newton123 is saying that someone or something goes and mechanically changes the stock price ex-dividend.  I think s/he is saying that the market tends to reduce the stock price, ex-dividend, by approximately the value of the dividend paid.

      The logic here, in the mind of the market, is that the company was worth some amount prior to the dividend. The value of the company includes all assets, including cash. When a cash dividend is paid, the value of the company is reduced by the amount of the cash paid out.

      AFAIK this was not the attitude of the market in days past (say, 40 or 50 years ago) when a larger percentage of investor-owned companies paid dividends. In those days it was felt that a company that paid dividends did so because it was profitable and it would continue to be profitable -- and continue to pay dividends -- in the future.

      And, of course, a large part of the reason the market's attitude has changed is because of the vulture capitalists, who buy companies to bleed them via dividends, whether or not they are profitable.

      I hope this helps increase your grokitude. :)

      •  Yes it does (5+ / 0-)

        Wall Street like everyone else is cutting things closer to the bone. (Because after all Wall Street drives so much corporate behavior.)

        This explanation helps because you couch the mechanism in terms of market forces. That makes sense to me.

        The bottom line then is the diarist is entirely correct. The CCOH price dropped to roughly 1/3rd its previous value after this huge dividend payout because market investors saw that dividend as destructive to the corporations overall value.

        That is the bottom line and that is the point the diarist was after. Tie a bow on tis we are done.

        Thank you kindly.

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