Next important variable is signals. Signals basically is, whenever we announce a dividend policy decision, the market is going to make something out of that, the market is going to interpret that signal. What the market interprets is important, because the markets interpretation would translate into a reaction into the stock price. If they interpret this as good news, they will drive the stock price up, and if they interpret this as bad news, they will drive the stock price down. The information that the dividend convey may be positive or negative, may be a good signal or a bad signal, but not necessarily in a very straightforward way. Meaning by that, that not necessarily would be the case, and every time that you increase the dividends that sends a good signal, and not every time that you decrease dividends that sends a bad signal. I'll give you examples of both in just a minute. Let me show you a couple of things that are related to this. This is about Apple. But in a more general argument, it says that the level of dividend declaration is an indication of how management sees prospect over the markets horizon, not just about today. A commitment to a progressive policy shows confidence about future earnings. In other words, because of the stickiness we mentioned before, a company that says "We're going to increase dividends in this quarter." Well, it's sending you the signal that they may keep the higher level of dividends up, quarter in and quarter out in the foreseeable future. Otherwise, they would not increase the dividends just because they think they're going to have more money today and they're going to revert to the level of money that they had in the past, in the near future. Only when dividends can be kept up, and that higher level is when management makes the decision of increasing dividends. Even more so, is the case on the downside when they decrease dividends is a much more extreme thing. Companies don't like to decrease dividend. Shareholders don't like dividend decreases, so companies only do them when they're certain that they will not be able to keep the current level of dividends in the foreseeable future. You're sending the signal, we're lowering the dividends today, but also expect the future dividends to go lower, or even at the same lower level than we have today. This is an interesting example. This is Starbucks', and what I'm going to say about Starbucks actually happens to many other companies are considered growth companies as you know, for many years, Starbucks has been on a huge expansion over opening stores all over the world. You seem to have one in every corner hear in Spain, although some of them had been closing lately. But we typically still think of Starbucks as being in a growth stage, and they have a lot of growth opportunities. Well, sometime ago, Starbucks decided that they were going to pay a dividend. Now in principle, being able to pay a dividend should be a good thing and shareholders should drive the price up for the reasons we mentioned before. That is, well, if Starbucks says that they're going to be paying a dividend, they give us the signal that they will be able to keep paying dividends in the future. That must be because the company is doing well. But, and here comes the interesting part of this. Starbucks is considered a growth company. When you buy Starbucks, what you buy is into the growth of this company, and if you trust the company, you trust the managers of the company, what you want is managers to reinvest the money wisely into the company. When a company of this type, and nowadays you can think of Amazon in exactly the same way. When a company of this type tells you we're going to start paying a dividend, that is actually a bad signal, and it is a bad signal because what they're telling you is we're running out of growth opportunities, because we can't grow as fast as we did in the past, then we're going to start sending you some amount of money, and for people that bought the company because of his expected growth, that is not a good signal. As you see, increasing dividends or starting to pay dividends may be interpreted not only as a good thing, but also as a bad thing depending on the type of company that you're talking about. Just to give you the flip side of the argument about that Telefonica case that I mentioned before, when Telefonica was considering at the beginning of the '90s, a company that always pay dividends, whether to pay less or whether to pay no dividend at all, what they decided to do in the end was to pay no dividends at all. They went from paying 50 percent of their earnings out as dividends to pay zero, and the market actually drove the price up about six percent on the day of the announcement. Why? Well, because the market thought that these investment opportunities, these growth opportunities that the company had, were good for them. They were happy of having the company keep the money and investing into those growth opportunities. As you see in this case, a company says, we're not paying dividends today, we don't expect dividends in the future, but that is interpreted as a good sign if you trust the management to make the right investment decisions. That's why the signal that you send with the dividend policy can be a little bit tricky. That was the case precisely with Starbucks. A company that tells you that, "We're going to start paying dividends, although we never did in the past." Well, that basically sends a signal that this company will not be growing as aggressively in the future as it has done in the past. This is the same thing that Buffett has always said. You have it here in this article, he says "The day we announced the dividend, the stock will go down." Because again, think a company that hasn't paid a dividend 40 plus years. Well, that's a company that, as a matter of course, shareholders trust Warren Buffett to reinvest the money wisely. The day Warren Buffett says, "We're going to start paying dividends." Well, the signal will be, "I'm running out of ideas," or "I'm running out of places where I can invest the money." As a matter of fact, a Berkshire Hathaway has a huge amount of cashes, huge pile of cash, and they don't quite know what to do with this. That's why there's some pressure always on Warren Buffett to pay dividends, and he's always said, "Well, instead of paying dividends, what we may consider is buying back shares,' and like I mentioned before, we'll talk about share repurchases in a few minutes. Bottom line with signals, the signals are sometimes difficult to interpret. The same decision may send a good signal or a bad signal depending on the company, depending on the environment. Like I said before, I am trying to stay away from talking too much about taxes because the countries where all of you come from maybe very different in terms of the taxes and you have to pay. But in general, it is indeed the case, particularly if you're a wealthy person in some country, that what you have to pay to the government in terms of the dividends you received in some places could be more than 50 percent. For each dollar that you're getting dividends, you have to send back the government half of that. Capital gains taxes tend to be lower, and by lower, I mean, well, that you would have to pay a lot less than the 50 percent or more that you may have to pay in some countries if you're a wealthy person in those countries. Sometimes management does need to take into account whether it could transfer money to the shareholders in terms of capital gains or in terms of dividends. These two things maybe different precisely because of the tax implications that they have. You actually see patterns in the data that relatively wealthy people, they prefer to stay away from companies that pay dividends because they know that a lot of the dividends that they put in their pocket, they have to take it out, and send them to the government, and nobody actually likes to do that. They prefer to buy companies in which they get capital gains as opposed to dividends, and those capital gains are always taxed at a much lower rate, and they can be deferred until the time when you sell the stock. All that said, and without getting into things that may be very different across countries, it is important for management to take the tax considerations of each country into account when they make a dividend decision. For example, let me give you this example, which is actually not too long ago. This is Oracle, and Oracle decided to pay the dividend for the following year on this year, simply because it was announced that taxes were going to increase and therefore shareholders would have to pay more taxes if you paid them the dividend next year as opposed to this year. Well, that's something that you would expect management to do. You would expect management to take into account your tax considerations when they determine how much dividends they pay or whether or not they're going to pay any dividends. This is the case. I like it because, I think that this would be the case in every country in which you live. If taxes are going to be increasing in the future, maybe management can pay what they were going to pay this year or next year, they can paid this year. Other than that, again, the differences are between capital gains taxes and taxes on dividends, personal income taxes may be very different across the many countries in which you actually may live.
