May 21, 2014 Comments

On Wednesday the S&P 500 rose 0.8% and Toronto rose 0.9%.

Element Financial rose 5.3% on some news it would make an acquisition.

Crombie REIT was raising money today by selling additional shares. It’s rather baffling to me why the market rewards the charade action of paying a large dividend only to take that money back in through share sales. Ultimately long-term gains come from earnings and cash flows, not this sort of financial engineering. It is true that the dividends are paid to existing share owners and the money is raised back from new owners but still I think owners would ultimately be better off if some earnings were simply retained for growth. Consider if if a huge investor initially owned 10% of a REIT after some years his ownership falls due to the share issuances. Or if he wants to stay at 10% he has to buy more shares (in effect give back the dividend), so what good did the dividends do in that case? In fact the dividends would trigger taxes in a taxable account whereas retaining the earnings should lead to an unrealized taxable gain and no tax. I believe REITS have benefited greatly from ever declining interest rates. At some point that will end and REITs will not look so good.

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