
Applied Game Theory or How to pay a dividend without paying a dividend - Hermel
http://meissereconomics.com/2016/06/01/Boskalis.html#main
======
dsjoerg
There is no game theory here. The value of each person's decision is not
affected by the decisions of others.

It's important to remember that the company's shares are traded on a public
market.

The shares distributed by the company are valuable and can be sold for the
same amount of money as the dividend you could have received.

The key fact that the article ignores is that the shareholders collectively
own the company. So if they all decline the dividend, they are effectively
electing for the company they own to hold the cash (that they own by owning
the company).

~~~
ghshephard
What the author ignored, is that when dividends are issued, the value of stock
(almost) always goes down by exactly the value of the dividend on the ex-
dividend date.

~~~
ucaetano
Not exactly.

If the company is hoarding cash, distributing dividends usually increases the
stock price, since cash value is not included in the stock price. This is
actually very important to understand, cash DOES NOT change a company's
valuation (there are some exceptions and edge cases).

And corporate cash is usually invested in low-risk, liquid securities, which
return far less than the average cost of capital for the company.

In other words, shareholders will be happier with the cash in their hands than
in the company's bank account.

~~~
dpark
How could cash not affect a company's valuation? This implies that the market
isn't merely irrational but idiotic. A company holding a billion dollars in
cash and nothing else should be worth a billion dollars (maybe slightly less
to account for the risk that the board could squander the money).

~~~
ucaetano
Imagine company A, which has no operation, only $1B in cash.

How much money do you need to buy this company?

The answer is zero.

You borrow 1B.

Buy the company.

Use the cash to pay back the debt.

Cash has no influence (with exceptions and edge cases) on a company's
enterprise value.

~~~
dpark
If you need to borrow a billion dollars to buy the company, then you _need a
billion dollars to buy the company_. The fact that you can use the cash the
company holds to pay off the loan is irrelevant. All you did was liquidate the
company. That doesn't mean it had zero value. It means that it had literally a
billion dollars in value.

Your broken logic could be applied to literally anything.

> Imagine company A, which has no significant cash, only a $1B tire
> manufacturing business.

> How much money do you need to buy this company?

> The answer is zero.

> You borrow 1B.

> Buy the company.

> Sell the time manufacturing business to pay back the debt.

> Manufacturing capacity has no influence (with exceptions and edge cases) on
> a company's enterprise value.

Or how about this?

> Imagine a used Honda Civic, which is a car that costs $10k.

> How much money do you need to buy this car?

> The answer is zero.

> You borrow $10k.

> Buy the car.

> Sell the car in parts on eBay to pay back the debt.

> Car parts have no influence (with exceptions and edge cases) on a car's
> value.

The fact that you can take out a loan to buy something, and turn around and
liquidate the parts of that thing to pay back the loan does not mean the thing
has no value.

~~~
ucaetano
Seriously, no.

Buying a Honda Civic is buying an asset which has intrinsic value, and can be
used to generate value beyond the $ price.

Buying cash gives you no additional value.

So trust me, the amount of cash does not change Enterprise Value.

If you don't believe me, read any valuation materials, such as Damodaran's.

~~~
dpark
You quietly changed from talking about stock price to talking about enterprise
value, a term which is defined to exclude cash. This is extremely
disingenuous.

If you want to argue that there is no value in taking over a company for its
cash, sure. If you want to argue that the market sees no value in cash, no.

~~~
ghshephard
I think we can all agree, that when an dividend is issued, particularly one
that is significant compared to the "Valuation" of the company, that the
_stock price_ (excluding normal day-day market and stock volatility) will drop
an amount very close to the amount of the dividend. So, for example, let us
say that we have a nice monopolistic utility with (for the sake of argument),
very little competition. For example, the Electricity and Water Utility in
Dubai, UAE. Let us say that the population has stabilized, and that it has $10
Billion in cash, has a nice stable cost structure with no major depreciations
in the future, and are generating $10 million in FCF and profit every year, on
assets that are worth $1B, and that the risk free interest rate is 1%. If I
were an investor, I would pay $11 Billion for this company. The Cash is worth
$10B, and the Business is worth $1B (1% of $1B is $10 million).

Now, let us say the business issues a special Dividend of $10B. Can we all
agree that a rational investor, on the ex-date, would now only spend $1B on
this company, instead of $11B?

------
JeromeLon
> creating a paradox in which everyone gets less by choosing more

This is so misleading.

When the company in not giving $10 of dividend, the whole company has $10 more
on its bank account, so it's worth $10 more overall, distributed across all
shares. Now if one share (worth $10 at current valuation) is created, all the
shares are back to their original value, and if that share is given to a
shareholder, he is effectively owning $10 worth more of the company than
before. He didn't get less. And if everyone does it (or everyone but one
shareholder, or any other combination) everything is still valid.

~~~
Hermel
The dilution does not affect everyone equally. Consider the extreme case of a
company with only two outstanding shares and 100$ in assets, so each share
trades at 50$. Now, the company emits an extreme dividend of 50$ per share.
The first shareholder choses cash andthe second one stocks. Now, the first one
ends up with 50$ in cash an 1/3 of a company worth 50$, while the second
shareholder ends up owning 2/3 of the firm, which is worth only 33$.

~~~
mapleoin
You're missing one important event. In the moment that the dividends are
issued (regardless of whether they are stock or cash) a part of the company's
value transfers into those dividends.

Your example cannot work because a company worth $100, cannot create new
shares worth $100 ($50 per share). (It could theoretically distribute a cash
dividend of $50 per share, but then the value of the outstanding shares would
be $0).

If it were to distribute say 50% per share. Then it would create two new
shares (in addition to the existing two). This would mean the new value per
share would be $25.

So investor A has one share worth $25 and a cash dividend of $25 (he owns 1/4
of the company) Investor B has one share worth $25 and one (dividend) share
worth $25 (in total 1/2 of the company).

~~~
apoverton
This is also an example of a repeated game, so over time if they maintained
their strategies, investor B would own the whole company.

Also depending on how the company operates, there is another element of game
theory because the controlling shareholder could elect to cancel all future
dividends. if you're the newly minted majority shareholder, it's probably in
your favor to do this immediately. In that case, the Nash equilibrium seems to
be both parties choosing the stock dividend (and effectively getting nothing).

While the 2 shareholder example is an oversimplification in this example,
after enough plays of the game (i.e. dividends) a large shareholder could take
control of the company if the other shareholders always choose cash.

------
mapleoin
They are paying a dividend, a stock dividend in this case. Stock dividends are
deemed to be more favourable to the investor because they have now been given
the choice of _when_ they want that part of the company to be transformed into
cash. Both a cash dividend and a stock dividend dilute the existing shares
price by exactly the same amount at the time that a company chooses (as long
as they are of the same value of course). In the case of the stock dividend,
the investors themselves are not diluted however.

 _Koninklijke Boskalis Westminster lets its shareholders choose whether they
want to receive their yearly dividend in cash or in the form of newly created
shares, creating a paradox in which everyone gets less by choosing more._

This is not necessarily true. It depends on the current and future value of
the company. If you get a cash dividend now and the value of the company rises
in a month, then you've lost out on that upward movement.

~~~
kgwgk
Getting a stock dividend is (assuming everyone does get it) a non-event. You
had $x in shares of a company valued at $y before the transaction, and you
have exactly the same afterwards. The only difference is that you had 1000
shares and now you have 1045. Saying that getting stock dividends is more
favourable to the investor that getting cash dividends is equivalent to saying
that getting no dividend at all is more favourable than getting a cash
dividend.

~~~
spacecowboy_lon
depends on how you are taxed

~~~
kgwgk
If your point is that depending on how you are taxed you might prefer not
getting anything than getting a cash dividend, I agree.

------
rskar
"...Boskalis can pay a dividend, without actually paying a dividend."

That is so very wrong. While the overall picture seems the same, the tangible
difference is in what each investor actually has at the end of each
transaction:

Option 1: Dividends as cash, which means cash leaving the company. Money is
transferred from one entity (the company) to another (a group of
shareholders). While shareholders are regarded as owners of the company, the
nature of their ownership doesn't always work quite the same as say ownership
of one's personal effects. Being a shareholder mostly means having certain
rights regarding how one gets part of the company's profits and the right to
vote on how the company is controlled. Payout of dividends means an immediate
reduction of capital for the company, and an increase of income to the
shareholders. So at the end the shareholders have the same number of shares
and a certain amount of cash. The market value of their shares may drop at
first as a reflection of the dividend payments (because technically the
company's book value does drop immediately). But let's be honest here, the
whole point of shares is the profit potential, so the pricing of shares
needn't be in strict alignment with the book value.

Option 2: Dividends as new shares means the company holds on to capital. At
the end, shareholders get more shares, which may suit them just fine if
they're not in any situation that compels them to liquidate. Extra shares
means having more to sell. Let's not hyper-focus on book value, since a share
price needn't be constrained by that. If there's a good chance that the price
per share will rise over time, then getting shares may be more profitable to
an investor than getting immediate cash.

As the old adage goes, you pays your money you takes your choice. Also, it
takes money to make money. But let's not get too hung-up on book value vs.
share price, or on whether money truly is a "store of value". There's an awful
lot of human desires and human efforts at play here, and in the end it's that
interplay of desires and efforts (i.e. what efforts must one undertake to
satisfy one's own temporal desires) that brings value to anything.

~~~
mywittyname
Right, these moves are not the same. To be the equivalent, the company would
need to offer to buy the newly created shares from the investor at a price
equal to the value of the dividend (even if that is a premium over market
value).

Over a long period of time, Option 2 results in a company with huge cash
reserves that aren't generating extra returns (see: apple). This could lead to
a situation where the market value of the stock becomes much less than its
intrinsic value and a hedge fund (or similar) could acquire a significant
holding in the company and compel the board to accept a complete buyout at a
discount. Forcing shareholders to accept 20-30% less and leaving them to sue
for the difference.

Dividends are the end-game for every company. It doesn't matter if they
distribute cash or buy back stock -- eventually they need to put money in the
hands of investors.

~~~
rskar
"...Eventually they need to put money in the hands of investors."

I get your point, and did not mean to oversell "Option 2". But then the
shareholders do get to vote on how they'd like it.

BTW, a truer example of "no dividends" is Amazon
([http://www.nasdaq.com/symbol/amzn/dividend-
history](http://www.nasdaq.com/symbol/amzn/dividend-history)) - Apple does
have a history of dividends ([http://www.nasdaq.com/symbol/aapl/dividend-
history](http://www.nasdaq.com/symbol/aapl/dividend-history)), certainly with
some regularity since 2012.

~~~
mywittyname
Berkshire is the ultimate example of no dividends, but their growth justifies
that. Amazon is probably a decade or more out from a distribution, they just
have so much opportunity for reinvestment that it would be foolish for them to
distribute dividends. I don't foresee a distribution under Bezos because he
won't stop steamrolling markets until he's dead.

Once a company stops expanding at a double-digit pace, it makes sense for them
to start paying dividends.

------
kriro
Possibly very naive question but why are dividends paid at all if it's
essentially a noop? If they are paid in cash the stock I own is worth less by
the same amount and if they are paid in stocks my initial stock is diluted by
the same amount.

Do voting and non-voting shares typically receive the same amount of
dividends?

The only differences I can see between cash and stock dividends is

1) For cash dividends I pay taxes now, for stock I typically pay upon the sale
of said stock.*

2) A company issuing cash dividends has less liquid cash in the bank (also
applies to the shareholders who get liquid cash).

*both are taxed as capital gains here, might be different tax wise in other countries which could complicate things

~~~
harryh
Companies, in general, pay dividends when they have cash that they do not have
a productive use for. It doesn't make sense for a company to keep too much
cash invested in a low return investment (like a bank account or short term
treasuries) so in this case the company gives it back to the owners so that
they can use the money more productively.

Interestingly enough this generalization is contradicted by several large US
tech companies who have accumulated unprecedented cash hordes. It's
interesting to think about why this might be happening.

~~~
kgwgk
It's in part because they cannot distribute that money until it's legally
owned by the US parent company and that requires paying some additional taxes.

~~~
harryh
Indeed it is. Also probably because tech is a risky field and companies feel
that calls for larger reserves.

------
plopilop
So the company issues more and more shares every year. Doesn't that deflate
the value of an individual share ? (More shares, but the company still has the
same overall net worth.) If so, is it really more interesting for the
shareholders to accept new shares, or is there a threshold, or some prisoner's
paradox ?

Also, this scheme leads to an exponential increase of shares, aren't there
some laws against it ? It seems a bit suspiscious to me.

Complete noob in finance/market rules, don't hesitate to correct me.

~~~
andrewaylett
Suppose a privately-held company is worth $1.1B, and has 1M shares over 1k
shareholders. Each shareholder has a net worth of $1.1M. The company decides
to issue a dividend of $100 per share.

If they hand out cash, that means the company is now worth $1B, and each
shareholder has $100k more in cash. But their shares are now only worth $1k
each, instead of the $1.1k they were worth before. The shareholder's net worth
is unchanged.

If they hand out shares, there are now 1.1M shares in the company, and each is
worth $1k, the same value per share as with the cash dividend. Each
shareholder has an extra 100 shares, and their net worth is still unchanged
from before the dividend.

So the key thing is that if they paid the dividend in cash, the overall net
worth of the company goes down -- so everything balances out between shares
and cash.

Of course, for a publicly-traded company the value of the stock doesn't
necessarily match the current net worth of the company, and the share price
fluctuates. So you'll need to work out for yourself whether you'd prefer to
have the stock (with the capital gains liability) or the dividend (with its
tax liability), possibly based on how long you intend to hold the stock.

~~~
plopilop
Thanks, I got it. More cash for the company, and same net worth for
shareholders (even more worth if you take taxes into account).

So this would lead to an exponential growth to the number of shares? It really
looks like a geometric progression. And, at the end, a huge amount of shares,
each worth nothing.

~~~
andrewaylett
I imagine the hope is that the company keeps growing, so the share price will
rise that way.

Also, the company can buy-back shares to keep the number in circulation lower
and to increase the stock price, or it can consolidate its shares by merging
them, so each shareholder receives one new share for each two old shares.

Lastly, if you're looking at stock charts, the data provider will usually
adjust historical values to take into account dividends and splits, giving you
an accurate view of what the price would have looked like if the number of
shares issued had never changed.

~~~
plopilop
I see. Thanks for the reply!

------
Scirra_Tom
If the company is doing badly, rational actors will take cash which could hurt
the company more at a difficult time. If this has not been accounted/planned
for, it could hurt the company.

------
cousin_it
Yes, stock dividends are effectively the same as stock splits, and both should
be no-ops (apart from obscure legal differences). But I don't see the game
theory angle. Choosing between cash and stock dividend is equivalent to
choosing between stock buyback and no-op. In both cases, I don't see why your
choice should depend on what other shareholders choose.

~~~
nabla9
No they are not.

Stock buybacks are effectively same as dividends. If company buys stocks from
the market , it increases the value for the shareholders.

[https://en.wikipedia.org/wiki/Share_repurchase](https://en.wikipedia.org/wiki/Share_repurchase)

~~~
nappy-doo
Not quite. Buybacks aren't taxed the same as dividends (in the US). As such,
they should be worth more than dividends to the shareholder: (all other things
being equal, your ownership stake increases from the buyback).

------
josh_fyi
Not paying dividends is actually quite common in tech companies
[https://www.quora.com/Why-do-only-a-few-technology-stocks-
pa...](https://www.quora.com/Why-do-only-a-few-technology-stocks-pay-
dividends)

------
golergka
I don't know much about this, but it seems strange. When company issues new
shares, it makes existing share owners percentage of the company go down — so
shouldn't they have control on when such an operation takes place?

~~~
kgwgk
In this case the new shares are distributed to the existing shareholders, so
they won't be diluted unless they want (and given that some will opt for the
cash, those who don't will end up owning a larger percentage of the company).

------
antihero
Isn't the income from selling any shares also taxed, though?

~~~
ojbrien
Yeah but as capital gains I believe, whereas a cash dividend is taxed as
income (Income is taxed at a much higher rate than capital gains)

~~~
harryh
If you have held the stock long enough then dividends can be taxes at the cap
gains rate. This is what a "qualified" dividend is.

[https://en.wikipedia.org/wiki/Qualified_dividend](https://en.wikipedia.org/wiki/Qualified_dividend)

------
blue1
That's called a scrip dividend, by the way.

~~~
kgwgk
That's the name in Europe, I think. The tax implications vary by country and
there are a number of ways that companies can do it. For example, a company
can give the option of getting cash while avoiding any actual outflow by
giving rights to all the shareholders and selling those rights on behalf of
the shareholders who want cash to give them a cash payment instead of the new
stocks.

