How Do You Invest When Companies Lie?
History is full of companies that have lied on their financial statements. As an investor how can you avoid investing your hard-earned money in companies that lie? The investing part is simple, and the answer comes from Lowell Miller. But first let’s take a quick history lesson:
Tyco Ltd: In 2005 its CEO Dennis Kozlowski and CFO Mark H. Swartz were found guilty of stealing $600 million from the company.
Enron: Once considered a blue-chip stock, in 2001 Enron shares dropped from $90 to $0.50. Enron used a variety of deceptive, and fraudulent accounting practices and tactics to cover its fraud in reporting Enron's financial information. In 2001 Enron suffered one of the largest US bankruptcies in history.
Parmalat: Its founder, Calisto Tanzi was accused of questionable accounting practices in 2003 when a €14 billion hole was discovered in the company’s accounting records.
Barings Bank: The bank collapsed in 1995 when one of its bank employees, Nick Leeson squandered and lost £827 million ($1.3 billion) through speculative investing, specifically in futures contracts, at the bank’s Singapore office over a period of three years, which was masked by manipulated records.
WorldCom: An internal audit report showed that the company has been using fraudulent accounting methods to hide its declining financial condition. In 2002 WorldCom suffered one of the largest US bankruptcies in history.
Business Insider (July 25, 2012) reports. “A recent survey of 169 chief financial officers at publicly-traded companies in the U.S. reveals an interesting finding: 20 percent of the publicly-traded companies that are required by law to report earnings results on a quarterly basis are probably fudging the numbers, and almost every single one of the CFOs surveyed agrees this is the case.”
In 2015, Toshiba CEO Hisao Tanaka quit after company lied about $1.2 billion profits.
This all sounds terrible, and makes investing seem very risky, but there is a way to avoid and minimize this risk. In his book “The Single Best Investment” Lowell Miller explains:
“…a company can tell you about its earnings, but there is always a certain ‘flexibility’. There is no flexibility when it comes to paying and increasing dividends. The company must have the cash to pay you. What you see is what you get. Through the dividend, a company can show you how well it’s doing. So dividends are real, like the income from an apartment building or from a liquor store or from a bank CD. And dividend growth is real.”
Dividends are payments made to shareholders, and once they are given out cannot be taken back. In 2000 I invested $2479 in TransCanada (TRP) and since then I have received $4606 in dividends just from TRP. In the event that TRP’s stock price drops or the company goes bankrupt I have already made a decent return on my investment.
Dividends are very important to investors, and companies that pay growing dividends prove that they are profitable in the long-term. Here’s a list of companies providing over 50 years of consecutive dividend increases:
- 3M (58 years)
- Coca-Cola (54 years)
- Colgate-Palmolive (53 years)
- Johnson & Johnson (54 years)
- Lowe’s (54 years)
- Procter & Gamble (60 years)
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