Hello, I am doing a presentation for a business class on
Yahoo's stock price, which has been flat for the last 2
years. Here are my 3 recommendations to increase their
stock price: Develope new applications, start paying
dividends & sell its stake in Alibaba Group. In your
opinion, would paying dividends raise the stock price by
enticing investors to buy? And by how much compared to the
dividend yield? Or will it lower or have no effect due to
Yahoo will have less money to spend on R&D or other
beneficial items.

Thank you very much,
John Rice

September 24, 2010

John,

I think the answer to your question depends on Yahoo's free
cash flow and consequently it's ability to support a
dividend.

If you can find the issue of Barrons from 2 weeks ago (I
think it was dated Sept. 13) there was an article suggesting
that tech stocks should pay dividends; it gave some
examples. I think it said that in order to motivate
equity-income investors to buy shares, the dividend would
need to be around 3.5%.

Most tech company's have been adverse to paying dividends.
It's a cultural thing - they're sort of stuck in the .com
go-go days. The investment community thinks of Yahoo as a
growth stock - or maybe lately as a special opportunity
because it was in merger negotiations w/ Microsoft.

Take a look at the recent news at Cisco regarding a dividend
and the market's reaction - did it move the stock price?

In my opinion Yahoo is an also-ran in its primary business,
on line search. It's best opportunity to enhance
shareholder value was a deal with Microsoft - but the top
management couldn't look past its own delusionary, ego fed
self-interest. Certainly MSFT had plenty of cash for a
generous deal and was motivated enought to restart the
negotiations after they failed initially.

The Yahoo share price may be flat today vs. 2 years ago, but
if you look at the time when they were in negotiations the
share price did move up in anticipation of a deal. That's
the driver.

Peter S.

John Rice wrote:
> Hello, I am doing a presentation for a business class on
> Yahoo's stock price, which has been flat for the last 2
> years. Here are my 3 recommendations to increase their
> stock price: Develope new applications, start paying
> dividends & sell its stake in Alibaba Group. In your
> opinion, would paying dividends raise the stock price by
> enticing investors to buy? And by how much compared to the
> dividend yield? Or will it lower or have no effect due to
> Yahoo will have less money to spend on R&D or other
> beneficial items.
>
> Thank you very much,
> John Rice

> Hello, I am doing a presentation for a business class on
> Yahoo's stock price, which has been flat for the last 2
> years. ....... In your
> opinion, would paying dividends raise the stock price by
> enticing investors to buy?

Hi John,

That is a question a lot of people would like to know the answer to.

Fundamental investors expect stock price to be related to earnings and
stock price growth to be related to earnings growth. If company
management can't find ways to utilize their capital to keep up the
earnings growth rate, they can provide return for their investors by
paying out some of their earnings each year in the form of dividends.

You could think of a dividend payout as a failure of management to
find something "better" to do with it's earnings. However, you can
also think of it as a commitment on the part of management to provide
a certain level of return to it's investors despite a moderating
earnings growth rate. Perhaps stock prices will not change as
drastically but they may move more consistently which may be more
attractive to certain types of investors.

I think a lot of people feel that the earnings of some of the tech
companies are not being reinvested well to produce the earnings growth
that will cause their stock prices to increase based on earnings
growth alone. Perhaps there are unreasonable expectations as to the
level of earnings growth they should achieve.

A management decision to begin paying a dividend or to increase a
dividend is certainly positive in terms of keeping investors. I'm
not sure it will be possible to see an immediate impact on a stock's
price. However, a fundamental investor is looking for steady and
consistent improvement over time. I think that a company management
that shows a track record of paying out ever increasing dividends is
showing a commitment to their investors to manage their business well
and that the payment of a dividend does have a long term positive
impact on a stocks price.
--
Laurie Frederiksen
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