Chapter 27. Dividends: Do They Make Sense in This Day and Age?

[D]ividend policy is irrelevant for the determination of market prices, given investment policy.[200]

Merton Miller and Franco Modigliani

The practice of paying regular dividends is a long-standing puzzle. In a well-known article, two Nobel laureates in economics, Franco Modigliani and Merton Miller, wrote that a company's value does not depend on its dividend policy; rather, value depends on how the company invests its resources. After all, dividends are equivalent to transferring shareholders' money from their accounts with the company to their personal accounts. When a company pays a dividend, its share price drops by almost the same amount as the dividend.

Berkshire Does Not Pay Dividends

Buffett seems to agree with academic thought on the topic of dividends. Berkshire Hathaway has not paid any dividends for the past 42 years. MIT professor and Goldman Sachs partner Fischer Black argued that because of the U.S. double-taxation structure where corporations first pay taxes on earnings and then individuals again pay taxes on dividends, both corporations and individuals should prefer no dividends.[201] Corporations should only return earnings to their shareholders as cash dividends when they do not have projects with reasonable rates of return and their own share prices are high. If the share price is low, they should repurchase their own shares.

Consider Citigroup, a large financial institution with a market capitalization ...

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