What are your Investment Rules?

[SBQ]

The only legitimate way to reduce company tax is to reduce company profits. If a company that is making a profit buys a company that is losing money, that is a sure fire way to do this. There is no other way to legitimately 'manipulate' (sic) the tax system in NZ that I am aware of.

Your alternative suggestion of a profitable company not paying dividends to shareholders will not reduce the tax liability either directly or indirectly to shareholders. At least it won't in NZ.



There is one other way to create new equity. Simply watch it materialise 'out of the ether' as evidenced by the increasing underlying value of existing assets on the books. This is what I have termed 'thin air capital' creation, and this is how Mercury Energy funds building their new power stations.... but I digress.

Paying dividends is a way to create demand for shares from another pool of investors. That should help support a share price and enable new shares to be issued at a higher price (theoretically good for all existing shareholders), as there will be less dilution when new capital is raised.

I won't defend the way WHS has been operated over recent years. I would say that I believe issuing junk bonds is actually the cheapest way to raise development capital, not utilising retaining earnings. But all this presupposes that the new capital raised will be wisely invested. And I think WHS shareholders of recent years can rightly question whether this has happened!

SNOOPY

I don't get your logic at all but I respect that. We all have differences in view. I'll try to explain my logic.

Where is the need for the company to reduce tax? What emphasis should a company reduce tax liability that i've mentioned? I did say that at the individual shareholder level, yes tax minimisation is #1 in any investment planning. If you're a share holder of a company that has that kind of logic ; then I would have to say that's not a very good company to own. It's not even remotely the concept of a company to exist if they have a motive to draw down expenses in all sorts of means just so they can lower their income. My view is simple, pay the going 30% corporate tax rate and KEEP THE $ in the 'shareholders equity' on the company's balance sheet. This will automatically raise the company's book value per share which is GREAT for the share holder. Never in the way of a 'growth' company should they have to rely on borrowing funds externally when they have enough after tax profits to be used to fund expansion.

How is demand created for shareholders? Well certainly not by paying dividends that draw down the book value of the company. In finance class, we spend a lot of time around the balance sheet and looking at external controls such as when the company floats more shares. There is NOTHING worse to the existing shareholders than when a company practices 'share dilution'. It's just pure evil. But what i've seen happen in NZ listed companies all too often, is they try to blind their current shareholders by issuing a sweetener dividend while at the same time, float more shares. That's ok, i've never expected the avg NZ shareholder to understand the ins and outs of financial statements. All that fancy annual reports that talk a lot a waffle but no direct disclosure of EPS (Earnings Per Share) ; you have to dig and calculate that yourself for most listed NZ companies.