The Intelligent Investor: The Definitive Book On Value part 53. The purpose of this book is to supply, in a form suitable for laymen, guidance in the adoption and execution of an investment policy. Comparatively little will be said here about the technique of analyzing securities; attention will be paid chiefly to investment principles and investors’ attitudes. We shall, however, provide a number of condensed comparisons of specific securities - chiefly in pairs appearing side by side in the New York Stock Exchange list in order to bring home in concrete fashion the important elements involved in specific choices of common stocks | 506 Commentary on Chapter 19 don t know how to turn excess cash into extra returns. What does the statistical evidence tell us Research by money managers Robert Arnott and Clifford Asness found that when current dividends are low future corporate earnings also turn out to be low. And when current dividends are high so are future earnings. Over 10-year periods the average rate of earnings growth was points greater when dividends were high than when they were Columbia accounting professors Doron Nissim and Amir Ziv found that companies that raise their dividend not only have better stock returns but that dividend increases are associated with higher future profitability for at least four years after the dividend change. 14 In short most managers are wrong when they say that they can put your cash to better use than you can. Paying out a dividend does not guarantee great results but it does improve the return of the typical stock by yanking at least some cash out of the managers hands before they can either squander it or squirrel it away. SELLING LOW BUYING HIGH What about the argument that companies can put spare cash to better use by buying back their own shares When a company repurchases some of its stock that reduces the number of its shares outstanding. Even if its net income stays flat the company s earnings 13 Robert D. Arnott and Clifford S. Asness Surprise Higher Dividends Higher Earnings Growth Financial Analysts Journal January February 2003 pp. 70-87. 14 Doron Nissim and Amir Ziv Dividend Changes and Future Profitability The Journal of Finance vol. 56 no. 6 December 2001 pp. 2111-2133. Even researchers who disagree with the Arnott-Asness and Nissim-Ziv findings on future earnings agree that dividend increases lead to higher future stock returns see Shlomo Benartzi Roni Michaely and Richard Thaler Do Changes in Dividends Signal the Future or the Past The Journal of Finance vol. 52 no. 3 July 1997 pp. 1007-1034. Commentary on Chapter 19 507 per .
