Originally Posted by
Scrunch
Compounding interest is great, but its benefit is neutralised a lot if there is leakage to the taxman. This leakage is minimal when dividends are fully imputated, but is pretty significant when there are no imputation credits and a significant dividend is paid. Overseas shareholders may distort the calculation a bit, but if all shareholders were on a 33% marginal tax rate, a full 2% of OCA's value is being gifted to the tax man each year. This choice to give away 2% of the company to the tax man each year could be part of why OCA isn't trading closer to, or above NTA. Sorry - if you had a discretionary expense lowering your surplus by $10m/yr wouldn't you look to address it?
A better alternative would be for OCA not to pay a dividend but buy-back 6% of its shares each year. This should give shareholders an additional 6%/yr tax-free capital gain rather than the 4% they get from receiving the dividend as cash. If someone wants the cash, they can sell a small proportion of their shares each year. Share buybacks are very common overseas, particularly in countries like america where imputation credits don't exist (hence the low dividend payments over there). The problem is educating some of the existing shareholder base that there is an alternative.