Thursday, March 8, 2012

Another way out of the Ponzi scheme

I have questioned the value of owning shares in a company, if the shareholder has no share of the profits, e.g. when the company pays no dividends. I noted that with young and promising companies one argument is that they need to reinvest in themselves to continue to innovate and grow, but that the expectation is that their revenues and profits will thereby increase, so that one day they will pay dividends to shareholders.

Ponzi aka "Charles Bianchi" under arrest circa 1910

There is another way out of the Ponzi scheme of buy low-sell high marshmallow stocks. In a posting a couple years ago, I mentioned that about a decade ago I had bought shares in Ben & Jerry's. Within a year, the company was bought by Unilever, and shareholders were paid out in cash, rather than in stock of the purchasing company. We doubled our investment, and thus shared directly in the boon for Ben & Jerry's. But then, B&J had been paying dividends I believe, and certainly Unilever was at the time and continues to this day. With a present-day P/E ratio of around 17, Unilever (UN) pays a dividend of 3.75%. Not too shabby in today's market. [And just for the curious, I currently own no shares of Unilever.]

Without selling your seemingly worthless shares of some high-flying company which can't deign to share the profits with its shareholders to some sucker at a higher price than you paid, you could hold out the hope that some other firm will eye the company whose shares you hold and pay a premium to swallow up their holdings and market share.

Perhaps Yelp is simply a takeover target, and that $1.5B in market cap will be just a tasty morsel, tempting some giant to swoop in and pay off shareholders to the tune of $3.0B for the chance to turn a profit where Yelp has yet to succeed. Alas, there aren't many companies or countries out there willing or able to gobble up Amazon, Google, or Apple. So, Ponzi it remains.

[I noted last week that I was aiming for a 40% allocation of personal investments in stocks. I've modified that target to 51%. But the sell off of shares continues. Current stock holdings tally: 72% and falling.]

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