More Virtues of Dividends

Jesper Medsen, CFA is a portfolio manager at Matthews Asia Funds, and he made some interesting points about Asian companies that pay dividends. Jesper noted that 20 Chinese companies whose shares were issued on foreign bourses have been the subject of recent financial scandals and frauds; only one of these companies paid a dividend. Having to pay a quarterly dividend, he feels, generally gives an investor like himself confidence that the accounting is a bit more reliable, simply because the company has to come up with the cash. He also notes that when he asks the managements of his Asian companies about their dividend plans and target payout ratios, he finds that these managements are much more focused on capital allocation, in part because of the discipline imposed by having to pay and grow a dividend. Good points indeed.

Reinforcing our point made in an earlier post, investor Ken Feinberg of Davis Funds argues at a Morningstar Conference that the huge cash balances of Cisco and Microsoft are somewhat illusory. Given the history of their managements' proclivities to spend foolishly on projects and acquisitions, an investor should look through these balances in making an investment decision. IBM, by contrast, seems to be better at allocating capital, despite having made some horrendous strategic decisions in the past. After the shakeups of Lew Gerstner, the company refocused and exited businesses like the PC, which it invented, because it felt that it could create much better returns elsewhere. Despite having lower cash balances that Cisco or Microsoft, IBM looks to many portfolio managers to be the better company and the better investment.