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Right, but dividends are also an expense for the company - once it distributes dividends it no longer has the money, therefore it is an expense.
On paper, it isn't an expense, but that is only because the definition of profits is asymmetric with respect to stockholders and bondholders.
Sorry, but that isn't an expense. Dividends are distributions to owners. Even though they both represent money going out of the company, they are very different things.
Expenses are incurred in the generation of revenues. Dividends don't do that.
Sorry, but that isn't an expense. Dividends are distributions to owners. Even though they both represent money going out of the company, they are very different things.
Expenses are incurred in the generation of revenues. Dividends don't do that.
Well, then interest isn't an expense either. A company's revenues come in whether it makes it interest payments or not.
The money was borrowed to put toward productive use. That productive use generates revenues. Interest is the expense associated with that activity.
The equity was taken from shareholders at IPO to put toward productive use. That use generates revenues. Dividends and capital gains is the expense associated with that activity.
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Originally Posted by TaxPhd
Are you really arguing that the cost associated with the use of money ISN'T an expense?
It depends on what you mean by expense but every reason that interest is an expense applies to dividends and every reason dividends aren't an expense also applies to interest.
The equity was taken from shareholders at IPO to put toward productive use. That use generates revenues.
I'm not sure if you are just being obtuse, or if you really don't understand the difference between debt and equity, or how revenues are generated.
Debt and equity investment both generate capital. However, only that generated by debt must be paid for in the form of interest.
If a company uses equity capital to generate revenues, to whom does it have to pay the corresponding expense? And what is that corresponding expense called? Hint, It's not "Dividend Expense."
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Dividends and capital gains is the expense associated with that activity.
Dividends are not required. Interest payments are.
The company doesn't "pay" capital gains, and cap gains are NOT an expense.
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It depends on what you mean by expense but every reason that interest is an expense applies to dividends and every reason dividends aren't an expense also applies to interest.
No, they're not the same. Not even close. "What is meant by expense" is well established. It isn't up to interpretation.
Accounting is very precise, and words have meanings. To try and equate two things that seem similar, but are in fact very different, is to change the meaning.
I'm not sure if you are just being obtuse, or if you really don't understand the difference between debt and equity, or how revenues are generated.
Debt and equity investment both generate capital. However, only that generated by debt must be paid for in the form of interest.
If a company uses equity capital to generate revenues, to whom does it have to pay the corresponding expense? And what is that corresponding expense called? Hint, It's not "Dividend Expense."
If it's reinvested then it becomes capital gains.
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Originally Posted by TaxPhd
Dividends are not required. Interest payments are.
Well, the company could offer zero-coupon bonds and not make periodic interest payments. This is analogous to not distributing dividends, as the former is a reinvestment of bondholder capital while the latter is a reinvestment of stockholder capital.
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Originally Posted by TaxPhd
The company doesn't "pay" capital gains, and cap gains are NOT an expense.
Actually in some cases it does. If it issues shares at IPO and later buys them back, the company does indeed "pay" capital gains.
Without a buyback this can be viewed as infinite deferral of capital gains.
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Originally Posted by TaxPhd
No, they're not the same. Not even close. "What is meant by expense" is well established. It isn't up to interpretation.
Okay fine, if you want to play the semantics game we can have expense and expense*. Interest is an expense and dividends are an expense*.
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Originally Posted by TaxPhd
Accounting is very precise, and words have meanings. To try and equate two things that seem similar, but are in fact very different, is to change the meaning.
Just because two things are not identical or one and the same doesn't mean there isn't a useful analogy.
And with that one statement you demonstrate conclusively that you don't know what you're talking about. Re-invested capital isn't capital gain.
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Originally Posted by ncole1
Well, the company could offer zero-coupon bonds and not make periodic interest payments. This is analogous to not distributing dividends, as the former is a reinvestment of bondholder capital while the latter is a reinvestment of stockholder capital.
No, it's not. A zero-coupon bond still pays interest. It is a requirement of the bond (and a required feature for the investor). Dividends are never required.
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Originally Posted by ncole1
Actually in some cases it does. If it issues shares at IPO and later buys them back, the company does indeed "pay" capital gains.
And you again demonstrate that you don't know what you're talking about. If treasury shares are purchased, there may or may not be a capital gain at the shareholder level. But the gain is solely determined in the hands of the investor, and it only comes by holding capital assets. A payment to a shareholder isn't a "capital gain."
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Originally Posted by ncole1
Without a buyback this can be viewed as infinite deferral of capital gains.
And you again demonstrate that you don't know what you're talking about. Capital gains are usually earned by the investor without any action at all on the part of the company. Not buying treasury stock in no way means that the shareholder's capital gains have been deferred.
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Originally Posted by ncole1
Okay fine, if you want to play the semantics game we can have expense and expense*. Interest is an expense and dividends are an expense*.
Just because two things are not identical or one and the same doesn't mean there isn't a useful analogy.
The argument you are making is as follows:
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I don't understand the accounting, but to my untrained eye, these things appear to be the same. So I will simply declare that they are same, and they need to be treated the same.
It is a wonderfully simplistic view, but unfortunately, the world doesn't work that way.
You might want to study up on the accounting for debt and equity, and then re-visit this topic, because right now, you are just embarrassing yourself.
And with that one statement you demonstrate conclusively that you don't know what you're talking about. Re-invested capital isn't capital gain.
Not directly, it isn't. However, when a corporation retains earnings and doesn't do a stock split, the shares have an increased value over time since they are backed by more assets and/or income.
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Originally Posted by TaxPhd
No, it's not. A zero-coupon bond still pays interest. It is a requirement of the bond (and a required feature for the investor). Dividends are never required.
Zero-coupon bonds pay nothing until maturity. The implicit interest is retained by the issuer during the bond's lifetime. A coupon-bearing bond is analogous to dividend-paying shares, while a zero-coupon bond is analogous to shares of a company retaining its earnings.
A company could, if it so chose, issue a 30-year zero coupon bond, and then buy the bond back 1 month before maturity. In that case it technically paid capital gains, not interest. The "implicit interest" was in the form of a discount of the bonds from par value.
Dividends are not required, but shareholders have the power to elect new members to their company's Board of Directors if they are dissatisfied with management decisions, including whether to issue dividends or not. In this sense, shareholders do (indirectly) have a right to dividend payments, unless the majority choose to forgo it in favor of retained earnings (corporate reinvestment). Retained earnings are related to capital gains on the shares in an analogous way as the lack of interest on a zero-coupon bond contributes to its capital gain, if it is bought back shortly before maturity.
The analogy is very strong. You seem to insist that I am wrong because you don't appreciate the analogy. While debt and equity are not one and the same thing, there is an analogy between the two types of capital. There are also gray areas between the two such as mezzanine capital or preferred shares which blur the distinction but I am ignoring those for simplicity.
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Originally Posted by TaxPhd
And you again demonstrate that you don't know what you're talking about. If treasury shares are purchased, there may or may not be a capital gain at the shareholder level. But the gain is solely determined in the hands of the investor, and it only comes by holding capital assets. A payment to a shareholder isn't a "capital gain."
Of course it isn't a capital gain. But the decision to issue a dividend results in a lower capital gain on the shares than would otherwise occur.
I do know what I am talking about.
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Originally Posted by TaxPhd
And you again demonstrate that you don't know what you're talking about. Capital gains are usually earned by the investor without any action at all on the part of the company. Not buying treasury stock in no way means that the shareholder's capital gains have been deferred.
I never said it did. You're putting words in my mouth.
Capital gains may occur with no corporate reinvestment. However, the capital gains on the share prices would be larger if the company retained the earnings and reinvested them with NPV > 0.
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Originally Posted by TaxPhd
The argument you are making is as follows:
It is a wonderfully simplistic view, but unfortunately, the world doesn't work that way.
Why should I believe you when you assert that I am wrong, if you don't even know what my view is in the first place?
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Originally Posted by TaxPhd
You might want to study up on the accounting for debt and equity, and then re-visit this topic, because right now, you are just embarrassing yourself.
Just for any bystander readers here, TaxPhd is correct.
And I'm also correct. There is an analogy between debt and equity, even though they are not the same thing.
If you don't believe me, Google "debt equity distinction". I have a lot of scholarly literature to back me up and explain that there are analogies between the types of capital despite the fact that there are also differences. You can only refute an argument by analogy with a relevant dissimilarity, not just any difference.
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