Dividends not always right fit for companies.

President Bush's proposal to eliminate the dividend tax prompted a flurry of Wall Street activity last week -- an initial surge in prices, followed by a separation of the prospective winners (cashrich companies) from the losers (real estate investment trusts).

But all the chatter is off base, sald Jeffrey Bronchick, chief investment officer at Reed Conner Birdwell Investment Management in Los Angeles. "As an investor," he said, the proposal "does not change one iota of the value of a company."

Companies are valued on their ability to generate cash, Bronchick added, and while managers must make intelligent decisions on what to do with those incoming dollars -- pay it out in dividends, repurchase stock, reinvest in the business -- any one of these choices may be right in some instances, wrong in others.

"If you're a management team and you feel your stock is worth $20, buying it back at $30 is stupid," Bronchick said.

In the 1990s, dividend yields fell below historic norms of 3 percent to 6 percent, partly because decreases in the capital gains tax made share buybacks more attractive, tax-wise, relative to dividends.

Some buybacks were made at high price levels -- at times with borrowed money -- and corporations also borrowed to make acquisitions that are now seen as expensive and unwise.

The debt hangover from these mistakes has been a major factor in major telecommunications industry bankruptcies and the general downtrend of stocks over the past three years.

A dividend tax cut would increase the attractiveness of dividends as opposed to buybacks and it may help companies avoid unwise investments. But it wouldn't change the fact that a company's value is built on the amount of money coming in, not how it is divvied out.

Some of the area's most successful companies, retailers like Guitar Center Inc., 99 Cents Only Stores and Cheesecake Factory Inc., are still plowing money back into their businesses for expansion. None pays a dividend.

Jakks Pacific Inc., a toy manufacturer with decent cash flows, has a policy of reinvesting in its business rather than paying dividends, said Genna Goldberg, a company spokeswoman.

"We have no plans to change this policy, rather we expect to provide shareholders with increased value through an increased share price and we'll use our funds to invest in our business," Goldberg said.

Proponents of Bush's plan say it would get rid of the "double taxation" of corporate profits at the individual level after they already have been taxed once at the corporate level.

The proposal might help a handful of cash-rich local companies, but others will have limited opportunity to take advantage of new tax breaks.

Hilton Hotels Corp., which already pays a small dividend, has made debt reduction a priority. It has $4.7 billion in long-term debt.

Walt Disney Co., which stumbled with large acquisitions of Internet properties and its ABC television network, recently had its debt downgraded. Disney has $14.6 billion in long-term debt. Its ratio of total debt to Ebitda, or earnings before interest, taxes depreciation and amortization, is 4.1, higher than what's generally considered comfortable.

"It remains to be seen whether (companies in the S&P 500) have the cash flow to make increased dividend payments," said Tom O'Hern, chief financial officer of Macerich Co., a Santa Monica-based REIT.

Macerich, like other REITs, has seen its stock price decline over the past week -- despite a high dividend -- as pundits predicted that the tax advantages assigned to REIT ownership would be nullified by the proposed tax change.

(There are no corporate taxes on REITs, because most profits are passed on as dividends, which would remain taxable under Bush's plan.)

But O'Hern points out that many of the current owners of REITs -- pension funds, individuals in retirement accounts, mutual funds -- are either tax-exempt or not overly tax sensitive. These groups are attracted to the high dividends at REITs, and they won't be affected as much by a reduction or elimination of the dividend tax.

Some local companies with strong cash reserves said they would look at their dividend policy once a change in the tax rules was made.

"If this proposal goes through, given our strong financial position, we would take a closer look at this possibility," said John Cygul, vice president of investor and corporate communications at WellPoint Health Networks.

WellPoint had more than $5.5 billion in cash and short-term investments as of June 30, but the Thousand Oaks-based health insurer doesn't pay a dividend. WellPoint historically has used its excess cash flows to reinvest in the business to meet customers' needs and to buy back stock, Cygul said. Since 1996, WellPoint has bought back about $800 million of its common stock.

A stock buyback reduces the number of shares in a company, theoretically raising the intrinsic value of each share that remains outstanding. Shareholders who eventually sell their shares are taxed on the capital gains. That rate is generally 20 percent, compared with the 35 percent tax many dividend recipients pay.

Cash-rich local companies including mortgage lender Countrywide Financial Corp., grocery chain Arden Group Inc., insurer Wesco Financial Corp. and homebuilder KB Home declined comment on their plans.

Some cited proposals still in flux, or the lack of discussion of the topic at the board level. (Countrywide and KB Home each pay dividends yielding below 1 percent. Some analysts have questioned whether both companies' rapid expansion efforts are too risky.)

K-Swiss Inc., the Westlake Village-based athletic shoemaker, pays a small dividend, but it devotes more cash to share buybacks. The company has repurchased more than $84 million in stock over the past six years. Its dividend, paid at an annual rate of 4 cents per share, represents a payout by the company of less than $1 million per year.

"The first thing that would have to happen is the tax law would have to change," said K-Swiss Chairman and President Steven Nichols said. "After that happens, we'd think about (the dividend policy)."

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Low Priority

Companies that can pay dividends don't want to, while others tend to
debt loads.


                          Ticker  Closing Price   P-E   Total Debt/
Company Name              Symbol    on 1/9/03    Ratio    Ebitda

Jakks Pacific Inc.         JAKK      $14.30       8.1        0
Cheesecake Factory         CAKE       36.40      38.3        0
99 Cents Only Stores       NDN        28.40      35.8        0
Arden Group Inc.          ARDNA       60.50      14.9       0.1
WellPoint Health Network   WLP        70.66      17.4       1.2
Guitar Center Inc.         GTRC       20.66      21.3       2.4
Hilton Hotels Corp.        HLT        12.88      25.8       5.2
Wesco Financial Corp.      WSC       306.90      42.9      N/A *
KB Home                    KBH        45.23       7.1        4
Countrywide Financial      CFC        54.25      10.9      N/A *
Walt Disney Co.            DIS        18.08      33.5       4.1
Macerich Co.               MAC        29.90      18.8        7

                                      Cash &
                          Dividend    Equiv.
Company Name               Yield    (millions)

Jakks Pacific Inc.           0        $101.3
Cheesecake Factory           0          21.8
99 Cents Only Stores         0         115.5
Arden Group Inc.             0          56.2
WellPoint Health Network     0       6,032.2
Guitar Center Inc.           0           4.5
Hilton Hotels Corp.          0          63
Wesco Financial Corp.       0.4        200.6
KB Home                     0.6        120.9
Countrywide Financial       0.9        508.6
Walt Disney Co.             1.4        1,239
Macerich Co.                7.1         63.2

* Debt/Ebitda not meaningful for financial services companies. Ebitda is
earnings before interest, taxes, depreciation and amortization.

Source: Bloomberg News