Cash for a company is like air for a balloon. If the balloon has enough air inside of it then it can easily let some out for others to enjoy. That's like a well managed company sharing its goodness with you. We can think of companies like Coca-Cola and Home Depot as well managed balloons. 🎈
(Well managed balloons ... now there's an expression!) 😄
Sometimes too much air is let out of the balloon. The balloon ends up deflating and losing its form. That's like a poorly managed company giving away too much cash when it should be conserving and reinvesting in itself. The stock price drops and the dividend is cut. Companies like Walgreens and Medical Property Trust come to mind. These are poorly managed balloons. 😔
Sometimes the balloon can dry up and pop. 💥 It can be unexpected like Enron when the accounting scandal was exposed or expected like Sears as the business deteriorated. We look back and say it was bound to happen. It's just hard to know ahead of time. 🤔
Making up for deflating and popped balloons is super hard. Your chart in Point #2 does a very good job showing this. I remember when I learned it way back it when. It blew my mind. When I told my kids about this over dinner they didn't believe it. Then we worked through some simple math and they still didn't believe it! 😏 They were little and their minds were probably blown away like mine was when I learned it too. 😶🌫️ Still, the mathematics don't lie!
Last idea to highlight is Point 4.1, where you quote the Crawford Investment Council PDF.
"1. Dividend returns are always positive."
Absolutely true. Why? Because you didn't explicitly pay for that dividend. You paid for the business ownership through the stock purchase ... but, you didn't put out any extra money to get that dividend. It's cost is $0.00. Someone could argue that the cost of the dividend is baked into the cost of your business ownership. After all, you are usually buying the company because of its dividend. Then we use that dividend as a return of your cost. Like we mentioned earlier, over a long enough period of time you will get all of your initial investment back. It's a refund, one little bit at time. 🙂 From either viewpoint, you win or your win. You get to pick which. 🤗
Maybe managing the cash flow of a company is like piloting a hot air balloon? You have to keep enough to keep the balloon afloat - let out too much, and you crash 😀
Cash for a company is like air for a balloon. If the balloon has enough air inside of it then it can easily let some out for others to enjoy. That's like a well managed company sharing its goodness with you. We can think of companies like Coca-Cola and Home Depot as well managed balloons. 🎈
(Well managed balloons ... now there's an expression!) 😄
Sometimes too much air is let out of the balloon. The balloon ends up deflating and losing its form. That's like a poorly managed company giving away too much cash when it should be conserving and reinvesting in itself. The stock price drops and the dividend is cut. Companies like Walgreens and Medical Property Trust come to mind. These are poorly managed balloons. 😔
Sometimes the balloon can dry up and pop. 💥 It can be unexpected like Enron when the accounting scandal was exposed or expected like Sears as the business deteriorated. We look back and say it was bound to happen. It's just hard to know ahead of time. 🤔
Making up for deflating and popped balloons is super hard. Your chart in Point #2 does a very good job showing this. I remember when I learned it way back it when. It blew my mind. When I told my kids about this over dinner they didn't believe it. Then we worked through some simple math and they still didn't believe it! 😏 They were little and their minds were probably blown away like mine was when I learned it too. 😶🌫️ Still, the mathematics don't lie!
Last idea to highlight is Point 4.1, where you quote the Crawford Investment Council PDF.
"1. Dividend returns are always positive."
Absolutely true. Why? Because you didn't explicitly pay for that dividend. You paid for the business ownership through the stock purchase ... but, you didn't put out any extra money to get that dividend. It's cost is $0.00. Someone could argue that the cost of the dividend is baked into the cost of your business ownership. After all, you are usually buying the company because of its dividend. Then we use that dividend as a return of your cost. Like we mentioned earlier, over a long enough period of time you will get all of your initial investment back. It's a refund, one little bit at time. 🙂 From either viewpoint, you win or your win. You get to pick which. 🤗
Love the balloon analogy!
Maybe managing the cash flow of a company is like piloting a hot air balloon? You have to keep enough to keep the balloon afloat - let out too much, and you crash 😀