Earlier this week, shares of Hollywood legend Metro-Goldwyn-Mayer
As Fool colleague Dave Marino-Nachison pointed out yesterday, this isn't a done deal. But, to judge by the stock price, the street is applauding. Forgive me if I withhold my praise and give MGM the hairy eyeball instead.
But why? Dividends are good, right? Didn't Benjamin Graham, in The Intelligent Investor, demand dividends before even considering a stock? Didn't Congress pass a dividend tax so little old dowagers could reap bigger payouts from their utility holdings? Doesn't the Fool have a newsletter dedicated to dividend payers? Shouldn't management return excess cash to shareholders?
There's a teensy problem with applying all that logic to this case: MGM doesn't have the cash to pay the dividend.
As of the end of 2003, the firm had $62 million in cash. So where would it come up with the estimated $1.4 billion to $2.1 billion that the dividend would cost? Borrowing, of course.
Am I the only one who thinks this is insane? Maybe so. Hey, if the U.S. government and American consumers can mortgage the future in order to feel good today, why not a Hollywood holding company?
I can think of a couple reasons. MGM's operating cash flow, which looked healthy enough last year, is dependent on the fickle entertainment business. You need only look at a few years' filings to see what I mean. Corporations, like individuals, are foolish (little F) to borrow against a paycheck that's subject to big changes.
Most alarming to me is that the payoff would send such enormous sums to insiders. Kirk Kerkorian, who controls nearly three-fourths of the company, stands to gain $1.0 billion to $1.6 billion dollars. Director Frank Mancuso could pocket a cool $5.5 million.
If MGM is so certain that its cash flow can support a dividend, it should start with a regular, affordable distribution. This giant lump sum smells awfully funny, and individual investors would be wise to get a better explanation from management before this proposed initiative comes to pass.
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