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Joseph P. Porter
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I am a retired college faculty in Philosophy, with specializations in Ethics, Socio-political Theory and Rational Choice/Decision Theory. My teaching focus was on Business Ethics, Medical Ethics and Logic. After retirement I freelanced as a Grant Writer/Fund Raising Consultant. I have taught at... More
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Joseph P. Porter's Instablog
  • Who Do You Trust When No One's Trustworthy? 2 comments
    Apr 25, 2013 10:57 PM

    Like most investors, and most writers for Seeking Alpha, I rely on the data I get from various sources. No one wants to figure out the quick ratio for a company on their own; no one wants to calculate EBIT, let along EBITDA; no one wants to have to determine the returns on assets, equity and investment. Those are difficult equations, requiring pouring over 10-K's till your eyes glass over and your brain goes numb ... sorta like watching your average commercial TV program.

    I turn to a set of websites I've come to trust: The Motley Fool, Yahoo! Finance, The Wall Street Journal, YCharts. Some of these sites make you pay for their data, or at least large portions of it (WSJ and YCharts, for instance). So I expect some accuracy.

    Now, I realize you cannot get everyone to agree on every figure; even with GAAP there are too many ways to determine some data, and two sources using their own methodology will come up with two different calculations. One accepts that, and expects that there is at least some rationale behind the difference that makes sense. If the various results all fall closely together, you figure that the right answer is somewhere in that ballpark.

    You go with it.

    But ...

    Most people with a modicum of experience in basic investing know how to determine a company's dividend yield: you divide annualized dividend by the current share price. Most accurate is the trailing-twelve-month calculation of dividends paid, since that tells you exactly what the company has paid. For projection's sake, some people use the method of taking the last month's dividend and extend that into the coming year (multiply by 4 for quarterly payments, by 2 for semi-annual, by 1 for the cheapsters companies that pay once per year).

    Simple, RIGHT?!?!?!

    In an article I'm just finishing up, I had to scratch 25% of my research when I discovered that some people do not know how to evaluate the legitimacy of a projected dividend yield. A few companies do not pay a set amount for their dividends, but pay irregular dividends for one reason or another. Some companies pay by how well they do per quarter, so that a good quarter will cough up a good dividend, while a poor quarter will pinch the pennies 'til they scream.

    Other companies, for one reason or another, will add extra to their Q4 dividend - a bonus resulting from the sale of a subsidiary, or (in the case of Vodaphone (NASDAQ:VOD)), because they just received a huge dividend payment themselves. Or, in some cases, a company decides to pay an advance against the next year's dividends in December, so they can help shareholders avoid higher taxes on those dividends the next year.

    It's this last type of case I am angry about. Usually, these companies announce what they're doing, keeping everything above board so as to avoid confusion. Our society's reliance on the computer, and keeping everything really simple so humans don't have to think too much, does its best to defeat the good intentions of these companies, however.

    Case in point: Simulations Plus, Inc. (NASDAQ:SLP), a small company that produces software for biomedical research. They pay a modest $0.05 per quarter dividend. Nothing ostentatious, mind you - simply a dividend yield of about 5% per year. Last December, however, they decided, given the state of things in Washington, that it might be better to pay part of this year's dividends in December, 2012, to avoid what seemed to be an unavoidable tax increase for 2013.

    Simulations even announced this move in what was a very nice statement, saying that they would pay three cents in advance for each of the first three quarters of 2013, paying that nine cents on top of the five-cent regular dividend for Q4, 2012.

    How nice.

    Except that now, every Tom, Dick and YChart with a financial website claims that Simulations pays a $0.56 per year dividend - over 13% yield! Simulations never made that claim - they were clear as a bell as to what they were doing (read here), but suddenly everyone is jumping around like crazed chimpanzees, amazed that the company is suddenly upping its yield to 13.89%.

    If these websites cannot get something as simple as a dividend yield right, how can you trust them to give you the correct tangible book value of a company?

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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Comments (2)
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  • Miz Magic DiviDogs
    , contributor
    Comments (4604) | Send Message
     
    Yep. Same thing happened with TWO. They paid a one-time special dividend, and all the charts and half of the writers claimed the new higher dividend going forward. Just the barest amount of research would have told the writers that they were wrong. After all, that's how I discovered it when I looked into the company (and decided not to buy at that time).

     

    Miz
    27 Apr 2013, 10:49 PM Reply Like
  • Joseph P. Porter
    , contributor
    Comments (754) | Send Message
     
    Author’s reply » It is good that these services can use technology to keep pace with the quickly changing market conditions, but somewhere there has to be a human, who can identify anomalous data for what it is, who ultimately vets the automated process to make sure that it makes sense, and that it reflects the whole story, and not just the numbers. I mean, when there is a published news release stating explicitly that this is a one-time advance to help investors work around potential tax increases, it doesn't take a Warren Buffet or Carl Icahn to recognize that, in fact, the next year's dividends are going to be lower than in the past.
    28 Apr 2013, 11:06 AM Reply Like
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