When the Profits Are Split
The Dutch East India Company, which we’ve already mentioned, paid its shareholders not a penny for eight years. Ships sailed for Asia and came back years later, and the company spent the money on new ships, forts and wars with the Portuguese. The shareholders grumbled. One of the founders, Isaac Le Maire, even put out a pamphlet against the board in 1609.
In 1610 the company finally paid its first dividend. In spices. The shareholders were handed mace worth three quarters of the face value of their shares, and the first payment in cash didn’t come until 1612.
Picture those Amsterdam merchants: eight years waiting for their share, and they get a sack of spices and now have to work out who to sell it to. You couldn’t explain the first truth about dividends any better. Profit isn’t money yet. It sits in the hold, in the warehouse, in what the customers owe you, in a new ship. And you can only split what’s in the till.
What Did We Take
Pistone describes a phone call that could have happened in any small office in the world. He was running a bookmaking operation for Lefty. Lefty calls, and in Pistone’s account it goes something like this:
Lefty: right, I’m getting a pencil, I’ll write the figures down. What did we take yesterday? Pistone: one thousand one hundred and sixty. Lefty: and the day before? Pistone: two thousand four hundred and eighty. Lefty: so for the week you’re fifteen hundred up.
Pistone answers yes, but a thousand of that goes to the worker’s wages, and that can’t be held back. Lefty groans. Their capo, Dominick Napolitano, known as Sonny Black, isn’t going to like it.
And Sonny, as it happens, wants Pistone to bring him two and a half thousand out of the bookmaking money. His people had been losing on football for three weeks running, and Sonny wanted to win it back. Sound familiar?
Strip away the local colour and what’s left? “Fifteen hundred up” is profit on paper. First you pay your people out of it, or there won’t be any profit tomorrow. Meanwhile the owner pulls cash out of one business to plug a hole in another. That’s a dividend too, only a very bad one: the money goes out not because the business earned a surplus, but because the owner had an itch. That’s how good companies go broke. When they have bad owners.
A Tithe Upstairs
How was profit split in the Family? Different ways. And the difference tells you something.
With the Morellos at the start of the century, Dash writes, individual members of the gang worked their small-time rackets however they liked, as long as they sent ten per cent upstairs. One young hoodlum described stealing fifteen pocket watches as a good evening’s work. Ten per cent went up from an evening like that too.
But among the Brooklyn Neapolitans, the Morellos’ neighbours and rivals, there was no such custom, as Critchley noted. Whoever started a job split the take with a few partners. Nothing went upstairs.
Every holding company settles the same question: what do the subsidiaries keep, and what do they send to the common pot? Leave everything at the bottom, and the centre has nothing to hire lawyers with, fight a war, or look after the men who are inside. Take everything to the top, and nobody at the bottom will bother trying. Ten per cent is a sensible middle. It seems everyone who ever collected tribute came up with it: the Church, the kings and the capos.
When to Pay Out
A legitimate company decides on dividends at a meeting and announces them in advance: on one day the list of shareholders is fixed, on another the money is paid. Bought the share the day before, and you get paid. Bought it the day after, and you don’t—and on that day the price usually drops by roughly the size of the payout. Money doesn’t come out of thin air. The company handed it to you and got that much poorer itself.
Which leads to a simple thought that’s hard to accept. A dividend isn’t a gift. It’s your own money: the company decided not to put it back into the business but to hand it back. Is that good? Depends whether it can invest the money better than you can. A young company with good projects is right to pay nothing, and an old one with nowhere left to grow is right to give everything back.
Sometimes companies give money back another way: they buy their own shares on the market, there are fewer shares, and the stake of everyone who stays grows. It comes out almost like a dividend. Only the taxes are different, and so is the shareholders’ mood.
How the Don Split It
Don Vincenzo split the profits once a year, before Christmas. Not every month, and not when someone asked. At first I thought the old man was being eccentric.
He explained it to me in my very first year, in the autumn, when the book showed a good profit on the oil and I suggested we split it straight away. The Don opened Signora Lucia’s notebook and showed me how much the restaurants owed us. Nearly all the profit was sitting with them, and another part was standing in the warehouse in tins. There wasn’t even a third of it in the till. “You split what’s in the till,” said the Don. “What’s written in the book gets split by fools, and then they borrow to pay themselves.”
Before Christmas he first set aside money for a new press, for the stock of oil and for a lean year. The people got only what was left over. In bad years they got less and didn’t take offence; in good years they got a lot and didn’t get cocky. Everybody knew the rule.
The Bottom Line
Don’t pull money out of one business to win it back in another. And agree on the split in advance: a rule everybody knows protects you from grudges better than any generosity.