News Buffet Spends $5 Billion For a Slice of TMSC

[bit_user]

Dividends are great things because they are honest. A stock holder is a part owner of the company, the entire point of owning a for-profit company is to make profit. It's the job of the Board of Directors to figure come up with how much should be put towards future growth and how much should be returned to the owners. Companies not paying dividends is what caused the entire "stock market is just gambling" thing to happen in the first place as how else is an investor supposed to get profit from their hard earned capital. Plus most of the time, what would of been dividends just ends up as stock options for the C-suite folks.

What I like about dividends is that they can prevent a company from just growing without bounds. Also, I see it as a form of wealth-redistribution (although you have to buy shares to get dividends, so the redistribution part is just corporate -> shareholders, rather than rich -> poor).

What I don't like about them is they drain the company of resources it could use for growth. It's not hard to imagine shareholders ratcheting up dividends, as much as possible, because they have no long-term interest in the company. If they accidentally strangle the company by extracting too much, they can dump their shares and move on to another victim. It's this "unproductive" nature of dividends that I think justifies taxing them at a higher rate, in order to discourage the activity. Same for share buy-backs.

You have to think of this in terms of global competition. For a company's balance sheet, a dividend just looks like an added cost or overhead. If foreign competitors don't have the same sort of boat anchor dragging them down, they can afford to re-invest more in their business and then we're left scratching our heads and wondering why our industry is all losing out to overseas competition. Granted, that's not the only reason, but it sure can't help.

Also, I really wonder if you have any evidence for assuming profits not paid out as dividends will otherwise end up in some form of executive compensation. I find it hard to believe, since C-suite execs are still obligated to run the company in the interests of shareholders. I'm not saying $0 of it would have gone to the execs, but certainly not 100% and probably not even half.

 

[palladin9479]

BTW, we shouldn't focus only on the US stock market, when talking about investing. Especially at a philosophical level.


Yeah, I just can't... with this debate.

@helper800 , there are different ways to look at things, and often no single perspective is absolutely correct. You just have to think about which characteristics are most salient/important/useful and try to find a perspective aligned with those. All of this can be colored by ideology, vested interests, or past experience, as well. I hope you can keep an open mind to different perspectives, but ultimately you're going to decide for yourself what you believe.

Yeah I was only focusing on US since that was the context of the discussion. Internationally all sorts of interesting stuff opens though the tax situation can get really weird for some folks.

 

[palladin9479]

What I like about dividends is that they can prevent a company from just growing without bounds. Also, I see it as a form of wealth-redistribution (although you have to buy shares to get dividends, so the redistribution part is just corporate -> shareholders, rather than rich -> poor).

What I don't like about them is they drain the company of resources it could use for growth. It's not hard to imagine shareholders ratcheting up dividends, as much as possible, because they have no long-term interest in the company. If they accidentally strangle the company by extracting too much, they can dump their shares and move on to another victim. It's this "unproductive" nature of dividends that I think justifies taxing them at a higher rate, in order to discourage the activity. Same for share buy-backs.

You have to think of this in terms of global competition. For a company's balance sheet, a dividend just looks like an added cost or overhead. If foreign competitors don't have the same sort of boat anchor dragging them down, they can afford to re-invest more in their business and then we're left scratching our heads and wondering why our industry is all losing out to overseas competition. Granted, that's not the only reason, but it sure can't help.

Also, I really wonder if you have any evidence for assuming profits not paid out as dividends will otherwise end up in some form of executive compensation. I find it hard to believe, since C-suite execs are still obligated to run the company in the interests of shareholders. I'm not saying $0 of it would have gone to the execs, but certainly not 100% and probably not even half.

All the companies with good long term performance tend to have dividends, they act as a balance against CEO's using huge stock bonus's to buy yachts and other luxury items. Usual dividend distribution is only 1~3%, which is barely inflation level if that. People should not be gambling in stocks or seeing them as "money", they are assets and should be treated the same as any other investment asset. Also money dispersed as dividends is from post-tax dollars, while money reinvested is pre-tax, corporations are heavily incentivized to reinvest income, but at some point must return value to their shareholders / owners. Companies sell stock as a form of capital generation, it's how they get money to grow in the first place, this isn't charity that capital needs a return on investment. Buying assets for dividends is buying future income, this gets a bit into the weeds here but there are some asset classes that are mandated to disburse 90% of net profit as dividends in exchange for preferential tax treatment. Smart investors can turn these investments into passive income streams.

 

[bit_user]

Yeah I was only focusing on US since that was the context of the discussion. Internationally all sorts of interesting stuff opens though the tax situation can get really weird for some folks.

But stocks also are far from the only form of investment. When we're talking about investing on a philosophical level, it can be counterproductive to focus too narrowly on the US stock market, which indeed has some peculiarities that make it more susceptible to a short-term, gambling-style form of investing.

 

[bit_user]

... dividends, they act as a balance against CEO's using huge stock bonus's to buy yachts and other luxury items.

I really wonder what you're basing this on. CEO compensation is decided by the board, the members of which are voted on by the shareholders (even if they're nominated by the CEO...) and which is supposed to act in the interest of the shareholders. So, you shouldn't need dividends, just to keep CEO compensation in check.

Usual dividend distribution is only 1~3%, which is barely inflation level if that.

Of what? Revenues, profits, or market cap?

As for inflation, the stock price should naturally rise with inflation. It might lag by a little, but if the company remains equally successful, their earnings must increase with inflation, and if the stock price is at all related to the P/E ratio or EPS, then you'd also expect the stock price to rise accordingly.

Companies sell stock as a form of capital generation, it's how they get money to grow in the first place,

This used to be true. Now, most corporate capital generation happens through bonds and other types of loans. I think the main function of an IPO is to have a payday for the founders, VCs, and execs. Also, it generates publicity.

I don't want to complain too much, because we get a lot more insight into publicly-traded companies than private ones. So, there's still an upside to society, beyond dividends.

 

[palladin9479]

Ok to illustrate why the common view of stocks and assets are wrong, I'm gonna do some math one of the REITs in my portfolio, only because these things make great for demonstration purposes.


Medical Properties Trust, Inc (MPW)
Real Estate Investment Trust (REIT) that specializes in buying and renting out property to medical facilities.
https://www.medicalpropertiestrust.com

Stock Info
https://www.nasdaq.com/market-activity/stocks/mpw

https://www.nasdaq.com/market-activity/stocks/mpw/dividend-history

Now these guys were kinda expensive back in 2020, but they reliably generate income from the rent on hospitals and other medical facilities they own. Going to use a fictional $100,000 purchase back in January2020.

Historical

2020
1/06/2020 $21.03 ($100,000)
Dividend: $1.08 (0.27/0.27/0.27/0.27)
4733.11 @1.08 = $5111.75 Income

2021
1/05/2021 $20.88 ($98,827.33)
Dividend: $1.12 (0.28/0.28/0.28/0.28)
4733.11 @1.12 = $5301.08 Income

2022 $23.58 ($111,606.73)
1/04/2022
Dividend: $1.16 (0.29/0.29/0.29/0.29)
4733.11 @1.16 = $5490.40 Income

Our $100,000 investment has generated $15,903.23 of income over three years.

Now for November

11/16/2022 $12.3 ($58,217.25)

This is when people freak out, they see the stock price drop to 12.3 and imagine that $100K turning into $58K. But, it's still generating the same or more income and there is no loss someone sells. We still own the exact same 4733.11 shares and those share are still generating income.

Projected 2023 income
Dividend: 1.2 (0.30/0.30/0.30/0.30) (they grow the dividend at an extremely predictable rate)
4733.11 @1.2 = $5679.73 Income

Same shares generate another $5679.73 of income regardless of stock price. But it gets better, because the price is now nearly half, we can buy income more at a massive discount. Lets drop another $100,000 and see what happens.
$100,000 @ 12.3 = 8130.08
8130.08 @1.2 = $9756.09 Income

We just got 71.77% more income for 58.48% of the price. Our total yearly income jumps from $5679.73 to $15,435.82.

Now obligatory notice, this isn't financial advice as I'm not a registered financial consultant and none of you are clients, just using this stock as an example of how assets as investments work and how recessions are amazing investment opportunities. There are hundreds of financially stable companies that are now available at a discount, so don't freak out and do your own due diligence and research.

 

[palladin9479]

Of what? Revenues, profits, or market cap?

As for inflation, the stock price should naturally rise with inflation. It might lag by a little, but if the company remains equally successful, their earnings must increase with inflation, and if the stock price is at all related to the P/E ratio or EPS, then you'd also expect the stock price to rise accordingly.

Oh the stock price has absolutely nothing to do with inflation, it's a mix of performance metrics and market "feelings". Right now there is record inflation but most stocks are down 20~50% or more, it's why all the negative doom and gloom news from the talking heads on TV. The 1~3% number is dividend yield as income, meaning $100 of purchase is only getting you $1~3 per year of income.

I really can't stress enough that stocks are assets, they are actually an entire "asset class". Stocks are not bank accounts and should not be treated as such. You are paying money to buy an asset from someone who is selling that asset, every purchase needs to have a strategy. Are you buying that asset for income, or are you buying it to sell at a future date? If the former, then your going to base your strategy around PE, EPS and financial health. If the later then your going to either really need to know the market, have access to non-public information, or be extremely diligent in your market research. General Dynamics is currently selling at $250 per share with an annual dividend yield of $5.04 and PE of 20.67, making it kind of expensive. AMD is currently selling at $73.90, has no dividends and a current PE ratio of 22.29 and PEG of 1.46. That puts AMD solidly into the overpriced category. Of course AMD is a tech company and tech stocks are always overpriced since everyone has gone nuts throwing money into tech.

 

[helper800]

BTW, we shouldn't focus only on the US stock market, when talking about investing. Especially at a philosophical level.


Yeah, I just can't... with this debate.

@helper800 , there are different ways to look at things, and often no single perspective is absolutely correct. You just have to think about which characteristics are most salient/important/useful and try to find a perspective aligned with those. All of this can be colored by ideology, vested interests, or past experience, as well. I hope you can keep an open mind to different perspectives, but ultimately you're going to decide for yourself what you believe.

I guess I should have been clear as to what I was saying in the offset to everyone. I was speaking on my opinions, experiential conclusions, and feelings on the general attitude of people who use the stock market. None of my assertions are FACT but are MY OPINION. My opinions include but are not limited to;

1. Investing is a form of gambling.
2. Randomly picked stock portfolios typically do better than managed portfolios.
3. The liquidity of stocks mean they are as interchangeable as money.
4. The value of a stock is as unpredictable as white noise and to think it is anything less than predictable is dangerous.
5. I do not deny the reality that over time stocks generally go up including after the following, however, when and what stocks plummet as they all eventually do because of external financial disasters is unpredictable. Most people do not have the luxury of having money in the market and when terrible things happen they may have to sell for terrible losses to put food on the table.

I am sorry if I have offended or otherwise put anyone down for their own beliefs. I tend to ride a hard line on my beliefs and can sometimes lose grasp of the whole picture.

 

[bit_user]

Oh the stock price has absolutely nothing to do with inflation, it's a mix of performance metrics and market "feelings". Right now there is record inflation but most stocks are down 20~50% or more, it's why all the negative doom and gloom news from the talking heads on TV.

Not directly, but over the long term stocks should "price in" inflation. The reason the market is down is due to the recessionary pressures from move by the Federal Reserve, among other things.

In other words, the short-term factors are weighing on stock prices more than the long-term effect of inflation is boosting them. Given time, I believe the market will return to its inflation-adjusted trend.

 

[bit_user]

I tend to ride a hard line on my beliefs and can sometimes lose grasp of the whole picture.

I think you're being too reductive. Like, "if it swims, must be a fish". Well, there are things which swim that aren't fish. Investing is similar, in that there's an element of risk, but that doesn't make it a complete game of chance.

 

[bit_user]

Medical Properties Trust, Inc (MPW)
Real Estate Investment Trust (REIT) that specializes in buying and renting out property to medical facilities.

It's these kinds of investment funds that buy up vital capacity and rent it back at arbitrarily high prices that I don't like. To use your example, I'm sure it's one of the many reasons medical bills are so expensive. If we apply it to housing, investors are buying up all the housing in this country, pushing up the purchase and rental prices of homes.

Normally, we could rein in this sort of extortion though levying higher taxes on less-productive investments, but the investor class has so much political power that it's not going to happen.

 

[palladin9479]

It's these kinds of investment funds that buy up vital capacity and rent it back at arbitrarily high prices that I don't like. To use your example, I'm sure it's one of the many reasons medical bills are so expensive. If we apply it to housing, investors are buying up all the housing in this country, pushing up the purchase and rental prices of homes.

Normally, we could rein in this sort of extortion though levying higher taxes on less-productive investments, but the investor class has so much political power that it's not going to happen.

That's ... not what those are at all. I'm beginning to think you want stuff to be "free" or publicly owned...

There is no "Dr. Evil" organizations going around terrorizing people with some master plan to drive the world into poverty. It's simply supply vs demand, and home buyers are already massively favored over investment buyers. Property values are sky rocketing around major metropolitan area's because local entities voted insane zoning / building ordinances that make it very difficult to build new capacity and thus maximizing the home values of those who already own. Commercial property is actually far better priced and the business's who rent them have that baked into the costs, especially since it's a deduction they take prior to taxes as a cost, unlike home owners who have to pay the mortgage mostly from post-tax dollars. MPW didn't steal it from the hospitals, the hospitals either sold it to them or they bought it from another owning entity. Here is a hint, business's typically don't want to property owners as they then have to hire property managers and accountants to do a ton of paperwork and deal with depreciation. By renting they can write the cost off as an operating expense and use it as a deduction against revenues. The owning company has it's own people who specialize in managing property and spread that administrative cost over dozens if not hundreds of properties. They can then claim accelerated depreciation against the rental revenue's as a capital loss and reduce taxes. I mean that's a hour+ long discussion by itself.

Also medical costs in the USA aren't nearly as insane as they are on paper. There are two costs, the "billing cost" and the "negotiated insurance cost". Care providers claim insane numbers because Medicare pays a percentage of that claim, while insurance companies set costs as part of their care network. Because of how I have my health plan set I get to see the actual costs via the Explanation of Benefits for every claim, It'll list a lab at $300 USD billed cost with a -$230 "insurance discount" applied and a $70 amount due. I've seen surgeries billed at $22K that was only about $5K paid.

 

[bit_user]

I'm beginning to think you want stuff to be "free" or publicly owned...

LOL. No, not at all. I don't see how you even get that from my comments. I simply want to see investments be productive, rather than rent-seeking.

There is no "Dr. Evil" organizations going around terrorizing people with some master plan

There doesn't have to be. Markets are about population-level dynamics. Where there are perverse incentives, we need regulators to step in and quash them with laws, regulations, or taxes.

home buyers are already massively favored over investment buyers. Property values are sky rocketing around major metropolitan area's because local entities voted insane zoning / building ordinances that make it very difficult to build new capacity and thus maximizing the home values of those who already own.

Ah, but you've put your finger on it. The political power sits with those who already own, be they investors or individual home owners. And they're happy with the status quo, because it means the value of their asset increases, so the result is sprawl.

Commercial property is actually far better priced and the business's who rent them have that baked into the costs, ...

I get that, but thanks for the explanation. The only concern I have is when the rent is priced high enough to spin those kinds of profits, then it feels like rent-seeking. You say the rents are priced into their costs, but who ultimately pays those costs? They're paid in the form of consumer medical bills and health insurance premiums.

I'm not saying there should be no option for hospitals, labs, and doctors offices to rent their property, however I also think the rental companies should have margins more like a utility than being able to charge as much as they can get people to pay. There's a big difference between regulated capitalism and socialism. Having said that, I guess you need to have some way to price real estate so it can be used in a fashion generating the greatest value and I don't really know what other models might exist for that, in a capitalist system.

So, I guess take these points with some amount of salt. I'm just sharing some aspects of capitalism that make me uncomfortable. I like to see the rewards go to those with the best ideas and expend the most effort, rather than those who simply have a lot of wealth which lets them buy up a lot of assets and commodities that others need. I suppose that ties in with some of my concerns about dividends, too.

Also medical costs in the USA aren't nearly as insane as they are on paper.

The USA spends twice as much actual money for health care as other developed countries, and we get worse outcomes. That points to market failures, many of which are well-understood and there's merely a lack of political will to put smart regulations in place.

I've seen surgeries billed at $22K that was only about $5K paid.

How much negotiating power your insurance company has depends on how competitive the medical market is, in your region. Groups like to go into a region and buy up all the hospitals, so they have more leverage with insurers.