Comments on: Why companies are raising their dividends A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: Burns0011 Tue, 24 Dec 2013 02:28:29 +0000 What helps the most, honestly, is not to focus on the shareholders, but to focus on the people who drive economic activity; their employees. Rather than engaging in buybacks and increasing dividends, they SHOULD be raising wages and letting money flow into the economy rather than hoarding it.

Yes, it’s important to ‘reward’ investors by giving them a return on their loan. But it should never EVER be the primary focus of any company. The primary focus of every company should be to provide goods and or services at a reasonable cost.

By: TFF Thu, 19 Dec 2013 21:25:46 +0000 Agreed, KenG. Most repurchase programs are only marginally useful. Some are a waste of money, or an attempt to sanitize excessive options grants to executives.

And yes, I understand why I stopped finding bargains. It was in some sense a bet on slow economic growth, an environment in which “financial engineering” has greater impact than attempts at operational investment (for most companies). As you say, the strategy attracted widespread attention in 2011 and has since pretty much played out. So time for conventional portfolio management unless/until the bargains return.

By: KenG_CA Thu, 19 Dec 2013 16:51:15 +0000 TFF, you’re making the point that only some share re-purchases help shareholders. For every IBM there are ten companies not as successful (okay, that’s a guess).

I don’t mind as much if stock re-purchases are described as attempts to drive share price, but calling that practice “returning cash to shareholders” is pure corporate speak BS. None of that money goes to shareholders.

You stopped finding bargains because after five years, lots of other people wanted the same thing you did. Companies need incentives to become vehicles for making profits by operating their business (i.e., selling things or services), rather than trading assets without adding value. If the tax system penalized hoarding and instead rewarded distribution of profits (dividends), profits would be re-circulated, and stock prices would have more correlation with their performance. And then you could own stocks based on whether you think they will make money, not whether you think other people will want to buy their stocks.

By: TFF Thu, 19 Dec 2013 14:00:26 +0000 Also should note, KenG, that the approach I’ve been using for the last ~5 years stopped finding bargains this year. The dividend growth stock meme may have played out? My portfolio at this point is pretty neutral with respect to the S&P500.

By: TFF Thu, 19 Dec 2013 12:04:52 +0000 @KenG, I focus on companies with a strong cash flow that use their cash sensibly. I’m happy with share repurchases as part of the picture, at least when the P/E is low. I’m less happy with share repurchases as the exclusive use of cash. You are right that most share repurchases are poorly timed, executed when business is good rather than when the stock is cheap.

No proof, but I suspect that share repurchase programs don’t typically create supply scarcity in the market. Liquidity is far too high and the volume repurchased is too low.

Given a sufficiently low valuation, a strong share repurchase program will force prices higher regardless of speculator psychology. Try totaling up the amount that IBM has spent on share repurchase over the last decade — if it were still selling at $80/share, how many shares would still be outstanding? Per-share earnings would be through the roof, and the speculators would eventually take notice.

By: weiwentg Thu, 19 Dec 2013 11:59:22 +0000 Felix, I think you miss Matt’s point – he thinks that companies should return cash to society as a whole, if necessary by sinking money in pie in the sky projects that mosly fail but could have enormous payoffs.

I agree with him.

I have to admit that in general, I would like companies to pay more in dividends rather than sitting on the cash. I prefer dividends to share buybacks because it’s actual money. A good chunk of my retirement portfolio is in dividend paying stocks. But the thing is that when companies pay dividends, the most of the money goes to the 1%. They may buy yachts or whatever and stimulate the economy. But perhaps it would be better for society as a whole if companies did what Matt is suggesting.

As to dividends or buybacks: dividends go to the people who currently own the shares. Buybacks, if the company actually follows through, rewards anyone who owns the shares or sells them shortly thereafter. I am not saying that companies should set out to screw the Icahns of the world, but they should favor dividends because they reward the current shareholders. Of course, shareholder is a pretty nebulous concept.

By: gman1 Thu, 19 Dec 2013 01:35:20 +0000 In practice, stock, buybacks take shareholder money and buy shares back from management at cyclical highs. Those were shares that shareholders granted to management at much lower levels. Rinse, lather,repeat.

Give me a growing dividend stream anyday. Also make it more difficult for management to do those all to common ego building value destroying acquisition binges.

As people pointed out up thread, huge component of historical long term equity gains come from the dividend reinvestment in big bear mkts.
Felix and Matt are really behind the times in there thinking on this. I expect more from them.

By: djiddish99 Thu, 19 Dec 2013 00:49:16 +0000 @behindthecurve – a look at GNP should (I think) account for some of the international exposure companies have. However, I’d be curious if the various tax entities foul up some of the country accounting, since US GNP & GDP are very similar. I believe about 40-45% of S&P revenues come from international segments (although these are revenues, not net income).

A better angle would be to look at S&P 500 earnings as a share of GNP / GDP. This chart looks a lot less scary (with the percentage coming in a little below 2007 levels), and fits better with the context of the discussion, rather than all corporate earnings.

By: Benny27 Wed, 18 Dec 2013 23:26:16 +0000 TFF,
you say, “Dividends are nice, but buying the largest dividends you can find is typically a poor strategy.”

Which is a strawman.

buying companies who have large dividends and GROW them at a consistent and large rate…now that is a good strategy, when shares are purchased at sound valuations

By: KenG_CA Wed, 18 Dec 2013 19:34:15 +0000 TFF, I thought you mostly bought stocks that paid dividends. If they don’t pay dividends, then the only criteria is do you think other people will want to buy the stock at a higher price. As Apple and Amazon have proven, it doesn’t matter if their profits grow or are non-existent, what matters is if people think the company will be more valuable.

If all stocks regularly just repurchase shares, and never pay dividends, then ultimately that action will be priced into all prices, and selling one buyback-adjusted stock to buy another one will result in no real gain.

If a company is actively repurchasing shares, you can sell a portion periodically, just as you can do if they are not repurchasing shares. They don’t make it any easier.

Companies that buy back shares are basically stock traders, and are subject to the same timing issues that other traders have to deal with. The managers are rarely expert at trading shares; sure, they know about the health of the company, and buying back shares sends a strong signal, but they’re not experts on reading the market.

If buybacks are designed to decrease the denominator, as you say, and not to reduce the supply of shares available for sale, then they are even more exposed to external factors that affect their stock price. P/E multiples do not follow a formula, and decreasing the denominator by 2% is no guarantee the share price will increase by 2%. Speculator psychology will have more impact on share price than the buyback, and the shareholders may end up with nothing to show for it.