Saturday, May 9, 2015

Dividends Give Management Discipline and You a Seat at the Table

A quote from Stephen Chazen the CEO of Wide Moat Dividend portfolio holding Occidental Petroleum underscores an important attribute for dividend investors.

“I think dividends—if there is a religious activity here, I think that’s it. It provides discipline to the management. Otherwise you print shares, do all sorts of wealth-destructive things. The dividends give you discipline.”

Investors always want to know not just that they are buying a piece of a business, but that they as an outside investor have a seat at the table, a voice in the overall direction. At the same time, the companies need a mission statement. For a company like Facebook its about identifying leading technology trends which can justify the massive purchases like Oculus and Whatsapp.

For companies that prioritize dividends its far simpler - maintain and increase the dividend. So any use of cash by management must be judged by that yardstick. That means in turn that when management evaluates the numerous options that any company has, it has to clear the hurdle that it would be able to continue to pay its dividend and increase chance for dividend growth down the road. So outside investors are present, not in person but virtually, in any major capital allocation debates.

I am sure that outside investors factor in on some level to most companies, whether they pay dividend or not, however its not always clear where shareholders fit versus management growth plans, incentive schemes, or corporate flavor of the month. In the case of dividends, we outside investors get our own line item on the Cash Flow statement- Cash Dividends Paid. We're first class citizens not an afterthought.

That's no guarantee that the right decisions will be made and there could be some cases where dividend growth should be put on the back burner for some period of time (in my view GE's current restructuring is an example here). Still the fact that dividends paid to outside investors represent a line item every quarter, year over year, that is expected to maintain and grow, this fact represents a distinctly different type of company-investor relationship.

In the case of Occidental this has proven to be profitable. Given the oil price crash, Shell and Chevron both had to borrow to pay their dividend, and they both had to hold the dividend steady because they do not have the cash flow for dividend growth. On the other hand, this week Oxy managed to increase its dividend by 4%. Shell and Chevron are both engaged in behemoth efforts with BG and Gorgon respectively, the much smaller Oxy is going the opposite direction, selling off its assets in Middle East and North Africa, and instead transforming into a pure play on its best asset the Permian. For investors, simplicity and focus often trump grand plans, especially when the company's management uses dividends as a filter for ideas.


  1. A subtle but critical perspective for any company/CEO to exhibit to establish lasting trust with shareholders. Chazen's comment is a little less extreme, but similar in effect to a comment by the CEO of Philip Morris recently indicating it would take a WW III to cause the company to cut the dividend.

    Thank you for your continued postings. I discovered your blog recently from a link at Monvevator and I have found your perspective insightful.

    Regards from Texas.

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