Comments on: Stock Buybacks versus Dividends

By: Chad Brand

Chad Brand — Fri, 22 Jun 2007 19:36:00 +0000

This is a good point. If you don’t trust management to spend the money wisely, then you would prefer they pay you directly via dividends. I would put buybacks in the category of a wise investment, but poor acquisitions do happen frequently and can be very bad, if not disasterous.

I would just add that you probably should not own stock in companies where you don’t trust the management, unless you have reason to believe they can’t hurt you.

By: Trader@Work

Trader@Work — Fri, 22 Jun 2007 19:25:00 +0000

Warren Buffett called it "Asset Allocation". Dividend and share buy back are very similar but it all depends on the management to think and act rationally. They should buy back share if the stock price is really cheap (compare to a conservative valuation), invest in the business for growth, else return the cash to the share holder.

Look at Bank of America, dividend increase 11.8 fold in 21 years. Those excess cash unless can be deployed in higher return asset, it should pay out as dividend.

But, lets see why dividend is better because

1. With dividend, the EXCESS cash is taken out of the management hand now and they won't able to do dump thing like buy another company that is not profitable as itself. They need to think or work harder to grow the business. They are just human, if you let them have too much cash, they work less and get lazy.

2. When the dividend paying is became a 'culture' (think all the banks), the management will hesitate to waste any cash they have. Think if all the previous CEOs keep the cash no dividend and didn't do much buy back because the stock price is too high. The next CEO come in, see all the cash sit around will be more than happy to announce a share buy back regardless of the share price. Benefit himself and next quarter wallstreet will see a jump in earning...

3. The investors may have other investment that is more promising than the current company, 15% tax yes, we feel the pain but if you talk about another long term investment (think 10 years), 15% is nothing, again think all the public service you are getting. (except funding the war, let's leave that part out here)

So, instead of depending the management to think rationally, dividend put money in share holder pocket. Look at all the coporate acqusitions, Boston scientifics buy Guident. Ebay bought Skype. Skype? A (almost) free online chat company. Talk about irrational thinking.

By: Chad Brand

Chad Brand — Wed, 20 Jun 2007 04:05:00 +0000

The counter argument to that pro-dividend stance would go something like this:

1) Cash on the balance sheet will go down with both dividends and buybacks. The money is used either to buy shares or pay shareholders, but the same amount of cash is used in both cases.

2) Buybacks are accretive to earnings per share. They give shareholders a higher ownership percentage in the company. This would not make them poorer.

3) Many people reinvest dividends they receive. This has the same effect as a buyback (instead of reducing share count to boost your percentage ownership, you buy more shares to boost your ownership). When reinvesting dividends, you trigger a taxable event, but with a buyback you don't owe any taxes and get the same benefit.

4) Using cash in a way that is accretive to earnings seems to me to be a great way to enhance shareholder value, not squander it.

By: Anonymous

Anonymous — Wed, 20 Jun 2007 02:49:00 +0000

Dividends are better than buybacks because they put money in your pocket. If a company buys back its own shares, but its balance sheet looks worse because it has less cash, others will sell the stock and it will fall to a lower level. Stockholders who hold their shares end up poorer because of the buyback, not richer.

If a company pays dividends to shareholders, the shareholders have cash in their pockets and are enriched even if they continue to hold the stock.

Unless a company is legitimately undervalued, stock buybacks are one of the most foolish ways that corporations squander shareholder value.

By: Chad Brand

Chad Brand — Mon, 18 Jun 2007 21:38:00 +0000

Exactly right, Zach. We can’t catch all the bad information out there, but educating people about some of it is important, and one of the goals of this blog. As you point out, oftentimes people will read something from someone who should know more than them, and therefore they simply accept what is said as fact without trying to poke holes in the argument that was presented.