In his Weekly Investing Roundup - November 2, 2007, The Dividend Guy wrote:
Even though I love dividend investing, there seems to be a real trend out there as companies turn to buying back shares instead of issuing dividends. I think there is a belief that buybacks bring more value to shareholders in the form of reduced float and higher share price. I am not convinced this is in investor’s best interests. Here is the article from S&P (pdf).
The Dividend Guy is certainly on point here. I have long thought that relying primarily on share repurchases for a company to return wealth to it shareholders was short-sighted. Earlier this week, I read an interesting article in Financial Week titled Buybacks don't always move stocks, S&P funds. It highlighted that share repurchases are not the panacea that is portrayed in the popular media. Below are some relevant excerpts:
Standard & Poor’s Equity Research examined 423 companies in the S&P 500 that reported share repurchases over the past 18 months. Only one out of every four, or 103 companies, outperformed the index after reporting the buyback, the study found.
“While these initiatives may create a positive aura around a company’s shares, our study showed an inverse link between repurchase activity and the returns achieved,” said the study’s authors, Stewart Glickman and Todd Rosenbluth of Standard & Poor’s Equity Research. “The companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period,” they said.
“We believe that share buybacks may sometimes be a subtle admission by management that reinvesting in their core operations does not represent a good opportunity,” said Stephen Biggar, global director of equity research for S&P, in a statement.
Companies like share repurchases because there is no long-term commitment and no expectation of consistency - attributes that are expected by investors in a good dividend companies.
What are your thoughts on share buybacks vs dividends?
Related Articles:
Hi Dividends4Life, great blog you have, and I love your mules introduction. Looks like you're quite a prolific blogger with almost a post per day. BTW, I'll add you to my blogroll after this. We don't have enough dividend investing blogs in Canada.
With respect to share repurchases, I'm a big fan. I'm not familiar with the specious study conducted by S&P, but any study done within an 18-month period is just deceptive, in my opinion.
All businesses are cyclical to a degree, and often the best action is to buy back shares instead of reinvesting into the core businesses, or at least temporary until businesses start to pick up again.
FJ: I am not against share repurchase – there is a delicate mix between it and dividend increases. Either taken to the extreme can be detrimental to a company. I work for a S&P 500 company. The decision tree we follow is: internal growth, acquisitions, pay down debt, share repurchases, let the cash sit on the balance sheet, moderate dividend increases.
I am a big fan of your site. Thanks for stopping by!
D4L
FJ and D4L,
I am not a fan of stock repurchases. I am a believer that, in general, continued stock repurchases without any real growth in company is an indication that management is not able to inject cash back in business. I work of S&P500 company. In the market domain, the growth has become standstill (but still very healthy cash flow) for last 5 years. All companies have resorted to buy backs instead of investing in core strengths or divident growth. There needs to be balance between all.
PI: You are correct. I too work for an S&P 500 Co. We use an IRR model to evaluate projects to determine if they are over the cost of capital. Generally, the highest IRRs come on internal projects, then acquisitions. Once these are exhausted we use excess cash to pay down debt, then to purchase shares. With annual dividend growth as a function of projected excess cash (within a reasonable range).
Best Wishes,
D4L
Hi Dividends4Life. I've really enjoyed browsing through your blog. Thanks for stopping by and commenting on mine (Stock Market Investing For Beginners).
On the topic of share buybacks, tax implications can have a big impact. Here in Australia, capital gains are taxed at a lower rate provided you hold a stock for more than one year. So provided the buyback doesn't pay too much for the shares, it can work out in favor of long term holders of the stock.
It doesn't help investors looking for income though...
AI: Dividend investing in the U.S. did not catch on until the tax rate was lowered on "qualified" dividends.
Capital gains are still more tax efficient, but not by as much as in th past.
Thanks for visiting and commenting.
Best Wishes,
D4L
I have posted on this topic over at Dividend Money and have a different view from that posted here.
Who actually benefits the most from share repurchases?
http://dividendmoney.com/stock-buybacks-who-benefits-the-most/
Tyler: Thanks for the comment. Your link cut off, so I reposted it here:
Stock Buybacks: Who Benefits The Most?
Good read, BTW.
Best Wishes,
D4L
I think raising the dividends should go hand in hand with share repurchases.
I think recently TCK announced this. Share repurchases by themselves seem very suspicious. (kind of how an investment bank firm will pay the top 6 execs $150 million in bonuses plus stock options and only $20 million in dividends to the shareholders).
LOD&PI: I agree that dividend and share repurchases should go hand in hand. From my perspective, share repurchases should be the residual after executing a defined growth dividend policy.
Best Wishes,
D4L