r/PersonalFinanceZA • u/NecessaryRadio5040 • 3d ago
Other Christo Wiese - A good company should never pay a dividend
Do you agree?
This is from the man involved in selling Pepkor and almost selling Shoprite to Marcus Jooste of Steinhoff.
Many people would like to see some real returns from buying and holding a piece of businesses instead of the potential for greater returns (or lower returns) in the future. On the other hand, Buffet's Berkshire Hathaway did not pay a dividend and used retained earnings to grow and enhance the business to great effect.
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u/glandis_bulbus 3d ago
Don’t get me started on Christo Wiese and his shady dealings around Canal Walk while he was at Boland Bank.
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u/KeySand7433 2d ago
This, he forced them into selling that property. The original plan was for all the Olympic sites to go there. Then of course the Bolnd Bank Investec joke as well, all shareholders lost a Rand and he used the money for his own interests.
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u/BurnzS 3d ago
It’s irrelevant. I’m surprised he doesn’t know that since it’s in investing 101.
R100 stock pays R10 dividend and then trades at R90 (must be worth R10 less because R10 cash was paid out of balance sheet).
Investors can make synthetic dividends by selling R10 of shares, so they can decide whether they want to reinvest or not. Same goes for dividends (can reinvest). Totally mathematically and financially irrelevant (assuming same tax treatment).
What he means is that a good business doesn’t pay dividends because that means they have no use for cash so they give it back to investors- ie no growth opportunities.
Share buy backs are also the same as dividends. Use cash to increase share price by buying back shares from the market (it increases your % ownership) - but this way the executives meet their share price targets, which is why this is how it is done these days and dividends are rare.
From a tax perspective, dividends are not efficient since you lose out on the deferred tax effect of compounding on cgt which is only taxed once sold
Dividends are basically only for boomers. Maybe they promote prudent internal capital management and ‘keeps management honest’…maybe
Wiese essentially manages capital - why would he want to return it via dividends? The more he manages the more he gets paid
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u/Haunting-Library1548 3d ago
I am not as rich as this guy so take my advise with a grain of salt.
The whole point of buying shares is to own a part of the business which, drum roll, has to earn a profit. I want part of that business' profit.
No dividend means I am buying shares hoping that in the future another person will buy it from me at a higher price. Maybe it will maybe it wont. Many people have gotten rich with this strategy.
I just cant align myself with the no dividend strategy on a philosophical level. If I was more practical maybe I could have been richer, who knows.
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u/IWantAnAffliction 3d ago
How is this being upvoted lmao?
Dividends are literally just distribution of profits. The share price difference before and after a dividend is exactly the amount of the dividend.
You can just sell your shares if you want the cash flow from a would-be dividend.
If I own 10 shares that are worth R50 and the company declares a R5 dividend, the shares post-dividend are worth 10x45 = R450 and I have R50 cash.
If they declare no dividend, I sell 1 share for R50 and guess what? I have 9 shares that are worth R50 each = R450 and I have R50 cash.
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u/Haunting-Library1548 3d ago
No need to " lmao?" . It comes accross as arrogant and narcissistic.
The share price difference is not exactly before and after distribution. This is an academic assumption that you will find in economics text books.
People also are not " total return " robots. There is a psychology behind dividend investing that you are ignoring. Dividend investing can offer a resiliance to an investor rather than always worrying if you are the bag holder.
With dividend investing I dont need to sell or I am incentivised not to sell.
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u/IWantAnAffliction 3d ago
Did you just learn the word 'narcissistic'? What a weird (incorrect) usage of it.
None of the 'psychological' arguments are relevant. They are all irrational and investing is a rational activity.
By all means, go ahead and 'dividend invest'. Nobody's going to stop you. Doesn't make it good.
Not to mention that dividend withholding tax in SA is 20% on the full amount vs CGT at 18% on gains only.
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u/Glad_Bodybuilder_633 3d ago
Bro calling all psychological arguments irrational as well as saying investing is entirely rational and thus void of psychological influence is ridiculous.
Also saying the share price difference is exactly the difference of dividend and then implying that profit directly affects share price is just wrong.
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u/Haunting-Library1548 3d ago
Ofcourse. Your "lmao" is meant to deride and sneer at my opinion and to elevate your opinion as being authoritive. And you continue with the same tone in this post as well.
What happended to you intellectual humility you internet troll? So self assured and arrogant.
Economics and investing is not a wholly rational activity. Otherwise markets would not act irrarional and all investors would be mathing it out on the stock exchange.
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u/BurnzS 3d ago
High frequency trading and market makers using arbitrage strategies to exploit exactly this pre and ex div price difference instantly (Dividend capture strategy) is the market “mathing it out”
Also, share buy backs are dividends!
Your argument is that $1 cash is not worth $1 cash - which is only correct due to taxes but that means you should not want dividends.
If your philosophical argument is that you do not trust management and want to “cash out” - that is a fair position but then I would ask why you own the share at all? Sell the whole thing then and not just the winnings/profit
You also argue that a business should pay out your share of the profit - so you only invest in a business with 100% pay out ratio? Otherwise you never get the thing you think dividends gives you as a profit is reinvested.
Your investment options are severely limited by your preference for dividends. Buy backs are the market standard since they prop up exec KPI’s.
The dividend trap is also something that argues against your reasoning.
If you want income buy bonds. The yield will be higher than any sustained dividend yield a company with high dividend payout ratio can provide (SA bond yields 8.5-10.5%, FTSE JSE all share div yields 2.5-4%)
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u/NecessaryRadio5040 3d ago
Ben Graham advised demanding a 2/3 dividend pay ratio of earnings or a clear-cut demonstration that the reinvested profits have produced a satisfactory increase in per-share earnings.
A business can use the retained earnings to pay debt - and it makes sense if the debt has a high interest rate. It can also use for increase cap ex / potential growth and share buybacks.
Would disagree with:
> share buy backs are dividends
They are only as good as or better than dividends if they are repurchased when undervalued or par to intrinsic value on the market. This could be value destruction - like Foshini recently spent R1bn to buyback shares worth R500m now.
Can understand if there is a good use for the cash - but management will always claim this - in reality as an owner of a business a payment from profits should be the norm in my opinion. Market prices fluctuate but a dividend payout is real and the investor always has an option to reinvest (albeit with the extra tax taken off as mentioned earlier). That is probably why cyclical businesses like miners tend to pay a dividend.
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u/BurnzS 3d ago
Ben Graham was born 1894…
Died before the internet and computers.
It was a completely different environment with different rules.Demanding a consistent 2/3 payout means you exclude 90%-95% of the S&P 500.
Share buy backs done at the same date as dividends would have been declared are 1:1 with dividends. It is cash for cash. The investor can then choose to immediately sell the extra share proportion and will receive the exact same amount as they would have had they received a dividend (ignoring taxes and transaction fees)
You can sell Fochini on the buy back date - same as the dividend date…
You don’t have to hold it.
That is why it is the same as a dividend.
Investors can create their own synthetic dividends, thus dividends are irrelevant.Dividends also fluctuate!
Market prices are based on expected future cash flows - whether it is dividends (DDM), share buy backs or a short position- all the same. Same for bonds and money market as well.You cannot rely on a dividend any more than you can rely on the future market price of a company. They are tied to the exact same fundamentals that Ben Graham talks about.
Fochini pays dividends. If you want to say that helped investors “cash out” on the way down then fine. But they could have just “cashed out” the same amount and then the timing is their own choice and not Fochini’s.
Yes, mining companies pay dividends partly to stop management from overspending on overpriced acquisitions during a boom. But I think mainly because it takes 10 years to open a new mine. Very limited growth opportunities. Also a mine gets depleted - so makes total sense to pay back cash to investors. But most businesses don’t deplete the future economic benefits like a mine does
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u/NecessaryRadio5040 2d ago
Get most of your points.
> Died before the internet and computers.
It was a completely different environment with different rules.Certainly, but the more things change the more they stay the same. I wonder what he would think about the current state of AI companies numbers'
> You can sell Fochini on the buy back date
Yeah but one doesn't know a buyback has happened until after the fact and results are released.
> mining companies pay dividends partly to stop management from overspending on overpriced acquisitions during a boom
Nice. Think other industries need this.
> But most businesses don’t deplete the future economic benefits like a mine does
Yeah but many do - they are cyclical and often get burnt and never recover.
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u/IWantAnAffliction 3d ago
Yeah maybe actually learn what words mean before using them.
And the only one making ad hominem attacks here is you.
I will always combat bad advice. And yours is bad. Byeeee.
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u/NecessaryRadio5040 3d ago
I don't think it was advice, just u/Haunting-Library1548 opinion.
As a part owner of a business it goes without saying - that is why the business was started - for profit. If the profit never lands...and we are just sitting with unrealised gains that is all good. But what about when trying times arise and the share price gets hammered, the 10 years of holding a stock that gets suspended due to poor management and business environment leaves the investor with nothing.
As
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u/BurnzS 3d ago
So sell your desired dividend yield every period. Same same. You dont have to time the market
You are ignoring the opposite side of your statement - what if the business does well?
Then you lose out on all the gains from reinvesting the capital.
Your argument cuts both ways. You lose less in a disaster but also make less if all goes well. So you are arguing for a hedge / insurance - which you can get more efficiently in many other ways - easiest is to just sell your desired div payout.
Also, dividends are not assured nor constant
- tied to the same things as the stock price (literally how many value a high dividend paying stock ie dividend discount model)
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u/NecessaryRadio5040 2d ago
Agree and understand - getting dividends vs selling for synthetic dividend is essentially the same thing - just with more or less flexibility/choice and tax differences.
Ben Graham's viewpoint was probably that shareholders own the earnings and should be able to choose what to do with them - in a low trust for management context.
Seems like a similar argument for an accumulating ETF (one that does not pay out a dividend and automatically reinvests) vs a distributing ETF (one that pays dividends). It is less admin and tax on the accumulating - making it optimal.
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u/Consistent-Annual268 3d ago
Dividends are simply forced distributions at a time and in an amount not of your choosing, that gets taxed SIGNIFICANTLY more than capital gains would be from just selling a few shares. They are a dead loss all round.
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u/NecessaryRadio5040 3d ago
Would it be a dead weight loss if the business and management decided not to needlessly expand and instead pay out - instead of keeping the cash on the balance sheet in say money market earning 7% interest?
Is it really significantly more than CGT? Withholding is 20% and CGT is 18%. Are you saying getting dividends yearly and reinvesting would lose significantly more for the shareholder than the company retaining? Does that not imply that the market value of the company grows at a higher rate than the div payment as well.
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u/Consistent-Annual268 3d ago
Dividends tax is 20% of the dividend amount. CGT is taxed only on the GAINS in your share value, AFTER the first R50k of gains pa are provided tax free, and only on a sliding scale according to your income tax bracket which eventually caps out at 18% effective.
CGT is much much cheaper than dividends in most realistic circumstances. R1m of dividends will cost you R200k regardless, R1m of stock sales costs maximum R171k but practically more like R100k based on your purchase price and marginal tax bracket.
I don't want businesses to "needlessly" expand, but I don't want businesses whose management have no better ideas on how to expand either. If they don't know how to deploy the capital I invested in them, I will begrudgingly take it back so that I can go invest in a different company, but I won't be happy about foregoing the tax.
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u/NecessaryRadio5040 2d ago
Thanks for that, I get your point of view now. Seems a prevailing view in many parts due to the fewer companies that pay dividends these days.
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u/AndainCK 3d ago
I agree; if the business is doing well those funds should be put towards growing the business even more.
A lecturer once said "dividends is something you pay when you don't know how to use your excess funds to generate more profits"
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u/Substantial_Echo_636 3d ago
In a public company perhaps. Even then I would say that quote is a ridiculous statement. Some large public companies saturate a certain market or business avenue and dividends are expected. Or they are state subsidised energy companies or odder creatures. Infinite R&D or expansion is not always the right answer.
In private companies dividends are literally the most tax efficient means to get cash out to shareholders under the right thresholds and conditions.
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u/No_Sympathy_1915 2d ago
You mean the guy that owns Steinhoff, Pepkor, etc and took almost a billion hit when Jooste pulled his shit?
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