Dividends and the Importance of Free Cash Flow

You have to love the GEICO commercials that run on television. Whether it is the little piggy going “wee, wee all the way home” or Randy Johnson throwing snowballs, they seem to strike our funny bone. A recent one is a spoof of the popular antique show from PBS where folks bring collectibles and have them valued. A lady brings a ceramic hand with a bird in it. The gentleman looks at her in all seriousness and announces that it is worth “two in the bush”. The lady that owns it is very happy to get that premium valuation. The US stock market has been handing out some very tough lessons to investors over the last ten years and, in our opinion, most participants are missing one of the more important of these lessons. Are you ready? A bird in the hand is worth two in the bush. For the owners of a business or partial ownership through publicly traded common stock, it is better to receive cash each year from the company over and above the cash flow that is reinvested into future company growth. In an article titled, “A Reality Check”, Marketwatch columnist Mark Hulbert draws on research which proves this point very accurately. His article refuted a popular theory which states that low dividend payout ratios should contribute to higher corporate growth rates.... Read more

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