There’s no shortage of examples in recent months (last few years actually) that everything ‘financial’ has gone topsy turvy. The flurry of gold companies introducing dividends is a case in point. After all, interest rates in North America are so low (you know all the reasons) that even a 1% to 2% dividend yield seems golden compared to money market rates. This following appeared in the paper this week:
The great dividend gold rush
From Tuesday’s Globe and Mail Published Monday, Dec. 05, 2011 7:55PM EST
On Monday, Goldcorp Inc. (G-T 51.84-0.49-0.94%) announced a dividend increase – its third in the last 13 months. Its decision follows similar moves this fall by Barrick Gold Corp., Yamana Gold Inc. and Alamos Gold Inc. Meanwhile, Newmont Mining Corp., Eldorado Gold Corp. and silver producer Hecla Mining Co. have vowed to link their dividends to rising prices for precious metals.
I believe odd decisions like these are a symptom of the mass hysteria – tempered due to fatigue but still evident – in global markets generally. Corporations and investors around the world continue to be under pressure to DO SOMETHING, but nobody really knows what to do.
Will the price of bullion decline to the point where those newly declared dividends are at risk? Perhaps not in the immediate future, but what is important is that company management sees no current need to invest aggressively in acquisitions or exploration with the excess cash. The message is simple – if we can’t confidently spend the money expecting a generous return on investment, then let’s give it to shareholders. After all, we’ve got to do SOMETHING! There are some who argue that the rationale for introducing dividends is to make the stocks more attractive compared to ETF’s (which don’t pay dividends), but frankly as a director myself on a company board – that sort of reasoning is dangerous since it could be interpreted as a short-term and haphazard attempt to succumb to trendiness.
On Sept 13, 2011 I wrote: ‘Either it’s 2007 all over again or China, or the U.S. and Japan are about the lead the charge back to some semblance of prosperity. One other factor to consider is seasonality. Typically the stocks of resource companies begin to rally right about now. Place your bets!’
Ironically, while high profile (subject to abusive scrutiny and criticism by press, analysts, hedge funds etc.) companies like these gold producers are confused about what to do, there still are others out there doing what they SHOULD do!
From Bloomberg News today:
KGHM will pay C$15 a share, a 41 percent premium to Quadra’s 20-day volume-weighted average price, Vancouver-based Quadra FNX said in a statement today.
KGHM is the world’s ninth-largest copper producer and third-biggest producer of silver, according to the statement. It will fund the acquisition using existing cash on hand, Quadra said. The transaction is expected to close in the first quarter.
Quadra, which also mines in Canada, announced a joint venture agreement in May with Sumitomo Metal Mining and Sumitomo Corp. to develop its Sierra Gorda copper and molybdenum project in northern Chile.
Quadra rose 32 percent to C$15.01 at 9:11 a.m. in pre- market trading in Toronto.
I suppose what I’m getting at is that sensible business decisions take place DESPITE the propensity towards hysteria. While some investors were blowing out European bonds yielding 7%, there were others on the opposite side of the trade who now own them at closer to 6% yields…..without getting into the math rest assured they’re making some serious money and as matters in the Eurozone gradually settle down they are likely to make a killing. Instead of just DOING SOMETHING, winning investors and companies alike have a tendency to ALWAYS DO SOMETHING SMART!
Decisions made because of panic or due to pressure are seldom good decisions. Usually, the instigators of P&P (panic and pressure) are hoping to profit at the expense of those who cave into the P&P. The following video illustrates the point – the enthusiasm in favour of DO SOMETHING makes for good entertainment and action……but mostly it means the instigators will make money.