Campbell Soup Vs. Disney Dividends (When Higher Yield Leads To Inferior Investing)

Peter Lynch once remarked that casual investors know just enough to be dangerous when they start combining two principles—the belief that having heard of a company that’s been around for a while is proof that it is of blue-chip quality with the belief that a low price-to-earnings ratio is proof that a stock is cheap.

By way of example, Lynch pointed to Ford Motor Stock (F) at the high point of a business cycle right before the economy turns for the worse because: (1) stock prices tend to be high when the economy is doing well, making investors feel more comfortable about making new stock investments despite all the historical studies pointing out that this is a bad impulse, (2) Ford “feels like a blue-chip” because investors have heard of it, and (3) the low P/E ratio lures people in, who are unaware that automotive profits fall 50-75% as the economy moves from the top of the expansion to the bottom contraction part of the business cycle.

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Microsoft’s 2004 Special Dividend And Growth Investing

I was reading a forum post at Money Crashers where Hank Coleman wrote an article four years ago concerning the effectiveness of one-time dividends, with Microsoft’s $32 billion special dividend in 2004 being the most famous example in the past generation.

Hank said:

The problem with Microsoft is that it is a cash cow like Frontier, but Microsoft cannot come up with much else to do with their free cash flow. They could be expanding, buying companies, coming up with new product lines, etc. But, no…they are just handing their profits back to their stock holders, and I think that is why stock holders have seen the company’s share price go nowhere for years now. In fact, shares of Microsoft are the same price and even a dollar less now than when it began issuing dividends in 2004.

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