<THE FOOLISH FOUR>
Foolish Four Report
by Robert Sheard
LEXINGTON, KY. (June 18, 1998) -- One of the points often raised in arguments about the overvaluation of today's stock market in general, and the Dow Dividend Approach in particular, is the historically low dividend yield for the Dow or the Standard & Poor's 500.
The argument is that if one uses historical yields as a benchmark, with yields much lower than that normal range, the market shows signs of being overvalued and the Dow Approach, which bases its purchase decisions on dividend yields, is going to be less effective.
Additionally, the practice of buying back company stock (which avoids the direct taxation on dividends), which competes with cash dividends for the company's resources, is more in favor than in the past.
First things first. I agree that the raw dividend yields are low historically, but so are interest rates and inflation. If one adjusts the average dividend yields for those factors, today's yields don't appear abnormally low at all. In addition, the Dow Approach has not suffered in the 1990s (as I discussed in my May 18th column). The average return for the approach has actually been higher in the 1990s than in previous decades. This is partly because the approach doesn't work simply on absolute yields, but it uses them only as a relative comparison among these thirty industrials.
On the other hand, there have been many suggestions that revising the model to account for announced company share buybacks might be a better way to measure such a quasi-dividend, but share repurchase plans are not easily measured. When Coca Cola <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: KO)") else Response.Write("(NYSE: KO)") end if %> announces, for example, that it authorizes a buyback of a certain number of shares over a certain time period, we have no way to measure when they'll do so, at what prices, or even if they'll buy all the shares they've been authorized to purchase.
The company's certainly not going to announce their purchases and risk driving the price higher before they buy as much as they wish. It may only be at the end of the authorization period, therefore, (sometimes four to five years in duration) that we'll find out what they've actually purchased. The information, in other words, just isn't available in any practical format to build into a simple and purely mechanical approach. With the dividend yield, one knows precisely what the yield is on any given date and can measure the changes precisely.
So while I agree that stock buybacks are a form of dividend that will help shareholders in those companies that actively repurchase their own stock, I don't see any practical way to make use of such a factor in our Dow model. And, as I've suggested several times, I'm not in the camp claiming the approach to be broken, so I'm not particularly anxious to "fix" it.
Come visit with me tonight at 9:00 (Eastern) in the Motley Fool Auditorium on America Online. I'll be taking questions and readers may order an autographed copy of my book, The Unemotional Investor. Fool on!
Current Dow Order | 1998 Dow Returns
[Robert Sheard is the author of the The Unemotional Investor (Simon & Schuster, 1998) available now at Amazon.com and your local bookseller.]
TODAY'S
NUMBERS
Stock Change Last -------------------- UK - 1/8 48.06 IP + 5/32 44.25 MO +1 3/16 39.56 EK - 3/16 67.75 |
Day Month Year
FOOL-4 +0.58% -2.24% 4.13%
DJIA -0.19% -0.98% 11.44%
S&P 500 -0.07% 1.43% 14.01%
NASDAQ -0.21% -0.35% 12.88%
Rec'd # Security In At Now Change
12/31/97 291 Union Carb 42.94 48.06 11.94%
12/31/97 206 Eastman Ko 60.56 67.75 11.87%
12/31/97 289 Int'l Pape 43.13 44.25 2.61%
12/31/97 276 Philip Mor 45.25 39.56 -12.57%
Rec'd # Security In At Value Change
12/31/97 291 Union Carb 12494.81 13986.19 $1491.38
12/31/97 206 Eastman Ko 12475.88 13956.50 $1480.63
12/31/97 289 Int'l Pape 12463.13 12788.25 $325.13
12/31/97 276 Philip Mor 12489.00 10919.25 -$1569.75
CASH $415.96
TOTAL $52066.15
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