Over the last month, a spate of companies have announced special or early dividends this year. For me, dividend stories are usually a yawner, but in this case there is a lesson about values and priorities
As background, on January 1st the tax rate for dividend income will go from 15% to as high as 43%. For some companies, like Walmart, it is a no brainer to pay its dividend December 27th instead of January 2. The move saves investors significant money, and it doesn’t impact the overall business. (And if the Walton family, who owns 43% of the company saves $180 million on their tax bill, so much the better for them.) Check out these articles in the WSJ and Daily Beast for more.
But what about Costco, that is borrowing 3.5 billion dollars to finance a $3 billion dollar dividend payout that wasn’t scheduled to take place? Or Oracle, spending $867.4 million on a dividend that will bring Larry Ellison, the CEO a payment of close to $200 million dollars? This is about bringing shareholders a short term return, which is ok with me. Corporations are founded to make money for investors.
From a business standpoint however, I think anything that prioritizes the short term over the long term is poor strategy. It sends a signal that percolates throughout the organization. Here is an example of that from my experience a number of years ago at a rapidly growing biotech company.
Late in Q1, the VP of marketing rather sheepishly told everyone to drop what we were doing, and find out what we could do to help make the quarter. And then, development resources were diverted from the new product to slam in a feature to help close a sale. We put together some last minute promotions. So the company sold the product in Q1 at a discount, instead of later in the year at full price when the customer swould have been ready to use it. The result: Less total revenue for the year, and long term customer relationships were reduced to transactional interactions.
My product manager buddies and I ragged on management, hoping someday they would get it. But we were the ones who didn’t get it. The company was telling us what was most important to them, and it wasn’t long term value creation.
Which brings us back to the dividend issue. Any way you slice it, a company that is pulling dividends forward by multiple quarters to save its investors money is focused on short-term returns and not long term-value creation. Next quarter, those investors will be looking for something instead of the dividends. What will management do?
Something to think about if you work for one of those companies. If the company doesn’t make the long-term value creation a priority, or sacrifices long term customer relationships for short term sales, it is hard to believe that long term employee retention is a priority.
If you have a job you like, with a good manager and a supportive environment, enjoy.
But if you are working like crazy and sacrificing your personal life in the hope that things will be better in the future, you may be waiting a long time. To quote Guy Kawasaki quoting an ancient chinese proverb “Man who waits for roast duck to fly into mouth must wait very very long time.”*
* APE: How To Publish a Book by Guy Kawasaki PDF edition p. 56
Tomorrow: Back to Busting Your Corporate Idol. If you like this post, you may want to read Chapter 3: The Corporation, The Real American Idol Here