On dividends

Your article in the Sept. 19, 1996 issue entitled Companies should use care in revaluing assets, incorrectly concludes that asset revaluation will damage the stock performance of public companies if finance ratios and dividends are impacted.

It is true that ratios may appear less favorable after an asset revaluation. However, to the astute investor, this is of little consequence. This is because the value of a company is not determined by simple balance sheet analysis, such as ratio analysis, but by the ability of a company to generate future cash flows. Those investors who have been educated in modern evaluation methods will not be fooled into believing that a company's worth (i.e. its ability to generate future cash flows) has been changed simply because of an accounting change to the balance sheet.

Furthermore, the article asserts that an asset revaluation may harm a company's ability to pay dividends. Remember that actual cash dividends come from cash generated, not from book profits. The impact on dividends will therefore depend on the revaluation impact on cash items, such as taxes due. Note that higher depreciation charges should actually decrease taxes due and increase cash available for dividends. This is in direct contradiction to your article, which stated "higher depreciation after revaluation will reduce a company's retained earnings and weaken its ability to pay dividends." Of course, the final decision regarding dividend payments lies with the dividend policy of the company and the requirements of Indonesian law.

Finally, the article claims that a company's shares are no longer interesting if the company cannot pay high dividends. This is simply untrue. Consider the growth company that must reinvest all its cash for several years, paying no dividends at all. The worth of this company can still be determined by calculating its estimated future cash flows, and in fact, this company's stock price may actually decrease if it choose to pay a dividend. This is because the investor's total return would be diminished if the dividends were not able to be invested elsewhere at as high a rate of return. The stock would therefore be less attractive to investors and its price would fall.

By consulting any standard investment textbook, people interested in this subject could learn the valuation techniques discussed above. The key assumption here is that market analysts are educated in such techniques, and can differentiate among those variables which truly affect the value of a company and those that do not.

CHERYL CARRUTH

Jakarta