The Fundamental Things
The much anticipated dividend tax cut, while sound long-term policy, will not be a quick fix to boost the stock market (WSJ article, registration required). The article echoes much of what was previously said in this post and its comments and adds to it.
The abolition of the dividend tax will provide a further premium to dividend-paying stocks, as investors will be willing to pay more for the higher return. Companies who pay dividends tend to be those that are more mature, not the high-growth companies. However, if a greater premium is paid for dividends, then some of those high-growth companies will alter their current strategies and offer dividends to their shareholders.
While this may seem, on the face of it, to be a good thing in the short-term, it is not necessarily. By paying out dividends, these firms will have less money to pursue growth strategies, such as acquisitions and capital expenditures. Much of what fueled the last bull market was a long, continuous period of corporate M&A and capital purchases. Companies who are issuing dividends will also not be able to buy back as many shares of their stock, which will depress earnings per share and, in turn, market gains. This is no short-term stimulus.
In the long-term, however, this will reward companies who, while not having superstar growth rates, have sustainability of earnings. The importance of that was lost during the dot.com bubble. People, suckered in by the lure of fast money, lost sight of the fact that the fundamentals had not changed. Multiples cannot be maintained on revenues. That point was driven home to us with a bang, or really a crash. Stock prices are driven by long-term profits. So while this move does not provide a quick fix for the market, it does offer the promise of a more stable market in the long-term. The fundamental things apply, as time goes by.