Thinking about all the cash Apple is holding on to makes me wonder about its dividend policy. Some of that cash would probably be better off in the hands of stockholders. I’ve been spending some time reviewing my copy of Security Analysis by Benjamin Graham and David Dodd. I’ve had the book since the early ’90s, when I was at Babson College. What Graham and Dodd wrote in the early ’30s on dividends applies just the same today. Here’s what they had to say:
Dividend Policies Arbitrary and Sometimes Selfishly Determined. –One of the obstacles in the way of an intelligent understanding by stockholders of the dividend question is the accepted notion that the determination of dividend policies is entirely a managerial function, in the same way as the general running of the business. This is legally true, and the courts will not interfere with the dividend action or inaction except upon an exceedingly convincing showing of unfairness. But if stockholders’ opinion were properly informed, it would insist upon curtailing the despotic powers given the directorate over the dividend policy. Experience shows that these unrestricted powers are likely to be abused, and for various reasons. Boards of directors usually consist largely of executive officers and their friends. The officers are naturally desirous of retaining as much cash as possible in the treasury, in order to simplify their financial problems; they are also inclined to expand the business persistently for the sake of personal aggrandizement and to secure higher salaries.
You want to make sure you invest in companies that have your best interests in mind. One way to do that is to invest in companies that have a secure dividend policy in place. Paying you, the owner, from profits requires discipline. It also requires cash. Those two qualities are a good start in choosing the types of stocks that will generate wealth for you and not just for the executive suite.
