America's No. 1 financial conglomerate

Chapter 495 Ernst's Business Philosophy

"As you know, MGM hasn't paid dividends to shareholders for two years, and many shareholders have expressed their dissatisfaction." This was the real reason Robert Iger approached Ernst; he needed to know if Ernst's attitude remained consistent.

The last time MGM paid dividends to its shareholders was in the early days of Ernst's acquisition of the company.

In order to completely dismantle the existing board structure and consolidate his control, Ernst paved the way for his subsequent complete dominance of MGM's management by distributing dividends as a direct means of transferring benefits.

That dividend was more of a strategic tool. As Ernst's control over MGM gradually solidified, he also began to show his true colors.

Last year, the large ship project achieved better-than-expected profits. However, Ernst rejected the dividend proposal, citing MGM's need to concentrate resources on comprehensive expansion and development, and invested all the project's profits into subsequent business development.

Many shareholders expressed their dissatisfaction, as MGM's dividends were a stable source of income for many.

Many of these shareholders rely on dividends to maintain the daily operations of their other businesses. The lack of dividends for two consecutive years has directly disrupted the financial arrangements of many of them and may even have a chain reaction on the other businesses of some shareholders.

Despite Cockerell's disastrous management of MGM, the vast majority of shareholders still supported him, primarily because he was able to provide them with stable returns every year.

In contrast, Ernst's practice of not paying dividends for several consecutive years undoubtedly shattered the original expectations of stable returns in the eyes of shareholders.

Ernst snorted coldly, his tone tinged with disdain, "A bunch of short-sighted fools."

Although he may have less say in MGM due to financing issues, his control over the company is actually increasing.

Whether it's Goldman Sachs, Bertelsmann, or the shareholders who see MGM's growth momentum, none of them will try to stop MGM's development by offering these small dividends; they will all choose to stand by its side.

He then reassured Robert Iger, saying, "You can reveal a little bit of information: not only will MGM not pay dividends this year, but it will not pay dividends in the future either."

The US stock market does not impose mandatory constraints on listed companies, stipulating how often listed companies must distribute dividends. Whether or not to distribute dividends, and the frequency of dividend distribution, are all determined by the company itself based on its financial situation and development plans.

Most companies choose to distribute dividends quarterly to retain investors, while some companies choose to distribute dividends semi-annually or annually.

It was actually Steve Jobs who truly championed the model of not distributing dividends.

His only goal was to develop Apple into a great company with global influence, and he insisted on concentrating all available funds on research and development innovation and production expansion.

In Steve Jobs' view, dividends would dilute the company's financial strength and affect the scale and speed of R&D investment. Only continuous technological innovation and product iteration could enable Apple to maintain its leading position in the fierce market competition.

However, with Steve Jobs' passing, Apple's dividend policy also changed.

After Cook took over as CEO, Apple restarted its dividend program, but the dividend amount has remained at a low level as a percentage of the company's net profit.

Some analysts believe that Cook's motivation is to solidify his position, gain more shareholder support, and help investors overcome the strategic uncertainty of the post-Steve Jobs era. Ernst also believes this is the reason.

Regardless, Apple has set an example, leading internet giants like Amazon to adopt long-term non-dividend strategies, with Berkshire Hathaway even going more than a decade without paying dividends.

Ernst is also a staunch non-dividend factionist, and this approach will likely be adopted by most of his companies, not just MGM.

"No more dividends?" Robert was very surprised. He thought that Ernst's decision not to distribute dividends was to leave MGM with sufficient funds for development. He did not expect that the other party wanted to implement this indefinitely.

"Do you know what this means?" Robert Iger couldn't help but ask Ernst, his tone tinged with worry. "Most investors will give up on investing in MGM because we don't pay dividends."

If MGM goes public in the future, its dividend policy will become a key factor in determining the company's stock price.

For many investors, stable dividends are a tangible return and an important indicator for measuring investment risk.

If MGM never pays dividends, investors will lose the expectation of stable returns, and the number of investors willing to invest will naturally decrease. The decrease in the number of investors will directly lead to a lack of competitiveness for MGM's stock, making it difficult to maintain a high level.

In response to Robert Iger's concerns, Ernst had his own ideas: "Not paying dividends doesn't mean you can't bring high returns to investors. Only companies that lack confidence in their management capabilities rely on dividends to stabilize investors."

He firmly believes that truly excellent companies should enhance their core competitiveness and optimize their financial structure to create long-term returns for investors that far exceed dividends.

"If we control our debt ratio well, and proactively reduce debt and repurchase company stock when the company has money, we will not lack investors."

Robert Iger's eyes widened. "You want to tie all the investors' interests to MGM?"

Under the traditional dividend model, investors can gradually recover their investment costs by holding stocks for a long period of time.

Even if MGM faces a business crisis or even goes bankrupt in the future, investors will have already received some returns or even recouped their investment through previous dividends, so they certainly won't lose everything.

This is the fundamental reason why most investors prefer to choose companies that pay dividends, because dividends provide them with a risk buffer.

But Ernst’s idea was precisely to break this risk buffer by creating scarcity for MGM’s stock through reducing debt and buying back shares.

From a financial perspective, reducing debt can significantly optimize a company's balance sheet, reduce financial risk, improve the company's credit rating, and lower financing costs.

Stock buybacks directly reduce the number of shares outstanding on the open market. If a company's performance remains stable or grows, a decrease in the number of outstanding shares will lead to an increase in earnings per share, which in turn will drive up the stock price.

Moreover, stock buybacks also send a positive signal to the market that the company's management believes the current stock price is undervalued, which can enhance investors' confidence in the company's future development.

This results in MGM's stock price far exceeding that of other entertainment companies with similar performance in the same industry, because it has a lower debt ratio and a larger cash flow.

This surge in stock price, far exceeding expectations, is like a carrot dangling in front of a donkey, constantly tempting investors' desires.

Once investors enter the game, a virtuous cycle is formed: the purchases of new investors will further push up the stock price, and the rise in stock price will attract more investors to enter the market, making MGM's stock always in a state of supply shortage.

Meanwhile, as the number of shares in circulation on the open market continues to decrease due to share buybacks, competition among investors will intensify, effectively adding another boost to the stock price.

During this process, even if some investors choose to take profits and exit at high stock prices, new investors will quickly fill the gap due to expectations of rising stock prices, continuing to drive up the stock price.

Step on your right foot with your left foot; this game can last a very long time.

"Investing always involves risk; it's like a game of musical chairs—it always ends up in the last person's hands."

This is Robert Iger's concern, because this model has a major drawback: financial crises.

When the investors who took over the company went bankrupt along with MGM due to the financial crisis, they helped MGM share the risk.

Starting a new round of musical chairs is much more difficult than for companies that distribute dividends.

Ultimately, investors are all short-sighted, including financial institutions.

Although they are more patient than ordinary investors, it is rare for them to hold stocks for more than eight or ten years, which is a value investing approach.

MGM wants to build a new ladder to attract investors' attention, either by delivering outstanding performance far exceeding expectations or by innovating.

The entertainment industry is not the technology industry; innovation is difficult, and consequently, it is rare to see outstanding performance that far exceeds expectations.

In the century-long history of film, there has only been one movie, Titanic.

"Don't worry, I have my own plans." Ernst gave the other person a reassuring look.

With Marvel and Pixar secured, Ernst has enough confidence.

The former is unlikely to lose money. As long as MGM is successful, the cost of each movie can be recovered through GG and other means even before it is released.

As long as long-term contracts are signed and actors' salaries are controlled, there won't be any problems.

In his previous life, the film company lacked confidence and needed actors to increase the film's fame, but Ernst knew about the success of Marvel movies.

Anyone who dares to show their face will be kicked out.

But has the latter ever lost the Xun (a type of ancient Chinese wind instrument)?

Seeing that Ernst insisted on his idea, Robert Iger said nothing more. He was indeed the manager, but Ernst was the real controller of MGM.