Dividend yield is a lot less important than buyback yield
Dividend yield is a lot less important than buyback yield
Another thread regarding dividends has inspired me to ask about this. According to Morningstar, distributing money to shareholders using buybacks is now bigger than dividends:
http://im.mstar.com/im/newhomepage/char ... 022015.png
Why is it that so many "dividend investors" or "income-focused investors" completely ignore stock buybacks? The tax treatment may be different in a taxable account, but in a retirement account it has the exact same net effect as if they paid a dividend and you reinvested it.
So when people are looking for high-yield in stocks, really shouldn't dividend yield be completely irrelevant? What really matters is that yield added to buyback yield.
http://im.mstar.com/im/newhomepage/char ... 022015.png
Why is it that so many "dividend investors" or "income-focused investors" completely ignore stock buybacks? The tax treatment may be different in a taxable account, but in a retirement account it has the exact same net effect as if they paid a dividend and you reinvested it.
So when people are looking for high-yield in stocks, really shouldn't dividend yield be completely irrelevant? What really matters is that yield added to buyback yield.
Re: Dividend yield is a lot less important than buyback yield
I think this is a worthwhile topic for discussion. Bumping the thread.
A fool and his money are good for business.
Re: Dividend yield is a lot less important than buyback yield
Not if the buyback money is used to fund CEO bonuses.Why is it that so many "dividend investors" or "income-focused investors" completely ignore stock buybacks? The tax treatment may be different in a taxable account, but in a retirement account it has the exact same net effect as if they paid a dividend and you reinvested it.
Paul
When times are good, investors tend to forget about risk and focus on opportunity. When times are bad, investors tend to forget about opportunity and focus on risk.
- Dale_G
- Posts: 3466
- Joined: Tue Feb 20, 2007 4:43 pm
- Location: Central Florida - on the grown up side of 85
Re: Dividend yield is a lot less important than buyback yield
Or if stock options are issued to managers in an amount equal to the stock repurchased. Oh, and if the market tanks, the company merely resets the price of the options. Buy stock at $100 a share, then sell it back to the managers at $50 a share. Makes sense for the managers.pkcrafter wrote:Not if the buyback money is used to fund CEO bonuses.Why is it that so many "dividend investors" or "income-focused investors" completely ignore stock buybacks? The tax treatment may be different in a taxable account, but in a retirement account it has the exact same net effect as if they paid a dividend and you reinvested it.
Paul
Dale
Volatility is my friend
Re: Dividend yield is a lot less important than buyback yield
I think it's naive to think that executives would just roll over and take less compensation. This is the CEO class we're talking about. They didn't get to where they are (individually or as a class) by settling for anything but the finest.pkcrafter wrote:Not if the buyback money is used to fund CEO bonuses.Why is it that so many "dividend investors" or "income-focused investors" completely ignore stock buybacks? The tax treatment may be different in a taxable account, but in a retirement account it has the exact same net effect as if they paid a dividend and you reinvested it.
Executive compensation is a legitimate fight, for shareholders and mutual funds not just policy makers. It would be nice if our tax efficiency didn't become collateral damage.
- Rx 4 investing
- Posts: 735
- Joined: Sat Apr 25, 2015 11:03 am
Re: Dividend yield is a lot less important than buyback yield
From Chuck Carnevale's article entitled " The Shocking Truth About Share Buybacks."
"Share buybacks are neither good nor bad, because in reality, they can be either or both. When a company's stock is being highly valued by the market, buying back shares at those high valuations can lead to long-term shareholder capital destruction. The rules and principles of only investing when valuation is sound equally apply to the corporation as they do to individual investors. If it's a bad idea for us to invest in a stock at a high valuation, it's also a bad idea for the company to behave that way.
On the other hand, when valuations are sound, or better yet, excessively low, the best investment opportunity a company may have is to invest in its own stock. Therefore, we as investors should not hold a prejudiced view of share buybacks. Instead, we should evaluate and judge a company's share buyback policy on an individual case-by-case basis. Prejudging anything in the general sense is both illogical and wrong.
Furthermore, as it is with all matters regarding investing, decisions should always be driven by a rigorous fact-based analysis. There is no room, nor should there be, for opinion or broad prejudicial generalizations. Clearly, the answer to the question of whether a company should buy back its shares or not can simply be stated as - it depends. "
http://seekingalpha.com/article/3151116 ... e-buybacks
On the subject of dividends, here are Carnevale's thoughts from his article entitled "3 Keys Why Retired Investors Should Put Maximum Focus And Weight On Dividends"
"An analysis of past, present and potential future dividend income stream can serve as an excellent barometer of fair value. Dividends are a reliable fundamental metric. Stock prices are fickle, unpredictable and unreliable. In today's low interest rate environment, prudent long-term investors, especially those in retirement, are best served by putting maximum weight and focus on dividends. "
http://seekingalpha.com/article/3220626 ... -dividends
Good luck out there.
"Share buybacks are neither good nor bad, because in reality, they can be either or both. When a company's stock is being highly valued by the market, buying back shares at those high valuations can lead to long-term shareholder capital destruction. The rules and principles of only investing when valuation is sound equally apply to the corporation as they do to individual investors. If it's a bad idea for us to invest in a stock at a high valuation, it's also a bad idea for the company to behave that way.
On the other hand, when valuations are sound, or better yet, excessively low, the best investment opportunity a company may have is to invest in its own stock. Therefore, we as investors should not hold a prejudiced view of share buybacks. Instead, we should evaluate and judge a company's share buyback policy on an individual case-by-case basis. Prejudging anything in the general sense is both illogical and wrong.
Furthermore, as it is with all matters regarding investing, decisions should always be driven by a rigorous fact-based analysis. There is no room, nor should there be, for opinion or broad prejudicial generalizations. Clearly, the answer to the question of whether a company should buy back its shares or not can simply be stated as - it depends. "
http://seekingalpha.com/article/3151116 ... e-buybacks
On the subject of dividends, here are Carnevale's thoughts from his article entitled "3 Keys Why Retired Investors Should Put Maximum Focus And Weight On Dividends"
"An analysis of past, present and potential future dividend income stream can serve as an excellent barometer of fair value. Dividends are a reliable fundamental metric. Stock prices are fickle, unpredictable and unreliable. In today's low interest rate environment, prudent long-term investors, especially those in retirement, are best served by putting maximum weight and focus on dividends. "
http://seekingalpha.com/article/3220626 ... -dividends
Good luck out there.
“Everyone is a disciplined, long-term investor until the market goes down.” – Steve Forbes
Re: Dividend yield is a lot less important than buyback yield
I understand that there can be criticisms thrown at managers who abuse stock buybacks. I'm not questioning that not all stock buybacks are actually good long-term. In the same way, many managers will refuse to decrease a dividend even if they really should, for fear it might cost them their job. Of course there is inefficiencies.
But the bottom line is that it's another method that managers return money to shareholders. And it is increasingly being used to replace dividends. Why do people seem to pretend that the buyback yield doesn't exist? It certainly exists and the net effect on your portfolio is the same as if you reinvested a dividend.
But the bottom line is that it's another method that managers return money to shareholders. And it is increasingly being used to replace dividends. Why do people seem to pretend that the buyback yield doesn't exist? It certainly exists and the net effect on your portfolio is the same as if you reinvested a dividend.
- market timer
- Posts: 6535
- Joined: Tue Aug 21, 2007 1:42 am
Re: Dividend yield is a lot less important than buyback yield
It seems that buybacks are a lower quality form of returns than dividends. Dividend levels are more stable than buybacks. Buybacks tend to be correlated with share prices, so you are receiving these distributions when valuations are less favorable. Therefore, all else equal, I would rather receive a 5% dividend yield than 2% dividend yield and 3% buyback.
Re: Dividend yield is a lot less important than buyback yield
Several questions:market timer wrote:It seems that buybacks are a lower quality form of returns than dividends. Dividend levels are more stable than buybacks. Buybacks tend to be correlated with share prices, so you are receiving these distributions when valuations are less favorable. Therefore, all else equal, I would rather receive a 5% dividend yield than 2% dividend yield and 3% buyback.
* what if you reinvest dividends?
* why not sell the buyback?
* if the answer is, "because mutual fund", why isn't this an easy route for outperformance for a cheap active MF? Treat every buyback as a sell signal.
* if you think cash is a better investment than the stock, why is the other 95% of your money in the stock in both scenarios? As in, 19 times more than the money we're arguing about.
I hate it when people in hindsight chew up management for buying at the same ridiculous stock price at which they (the critics) were holding the stock and looking forward to new heights. Management should not be market timers of their own stock. Whatever the market price is, that's a good price. They should not take on the yoke of regular dividends (at the possible cost of expensive financing later) or sacrifice my tax efficiency just so that they don't get blamed for the prices they bought. It's a price where I myself am holding the stock, so I'd know who's to blame if I believed in such things.
Re: Dividend yield is a lot less important than buyback yield
I don't know... there are obviously countless cases of buybacks or the lack thereof backfiring, but if anyone's in a position to potentially value a company better than the market can, it's its top executives.
Re: Dividend yield is a lot less important than buyback yield
I don't see it that way.lack_ey wrote:I don't know... there are obviously countless cases of buybacks or the lack thereof backfiring, but if anyone's in a position to potentially value a company better than the market can, it's its top executives.
* they aren't professional stock analysts, nor should they be. Think of externalities like interest rates.
* they can't expected to be impartial
* I don't even quite expect them to not be blindsided by their own pep talks. Remember, this is a board, people don't readily admit to each other that there's trouble ahead and they're looking for new jobs. Any company runs on a good amount of hot air (or mutual reinforcement, if you will)
* they might be on shaky legal ground if they're using nonpublic information for stock price predictions.
I think a much healthier attitude is: "I won't blame you for buying stock at the same $X that I bought at, or didn't sell at. If you have cash that you can't find a use for, give it to me in the most tax-efficient way possible and don't worry about dividend politics. At least from me. Talk again next quarter."
- market timer
- Posts: 6535
- Joined: Tue Aug 21, 2007 1:42 am
Re: Dividend yield is a lot less important than buyback yield
I think we both agree that dividends vs. share buybacks signal different things. Dividends appear to be a stronger statement by management about the sustainability of earnings. Whether this is useful for market timing purposes, I'm not sure. Certainly, it appears that one wants to invest more when buybacks are low, but I'm not sure if one should keep cash out of the market specifically for this purpose. To the extent a high dividend yield signals high earnings visibility in the future, I think investors in decumulation phase might want to overweight high dividend payers, as doing so reduces exposure to sequence of returns risk. If you can live off the dividends, you need not sell shares.ogd wrote:* what if you reinvest dividends?
* why not sell the buyback?
* if the answer is, "because mutual fund", why isn't this an easy route for outperformance for a cheap active MF? Treat every buyback as a sell signal.
* if you think cash is a better investment than the stock, why is the other 95% of your money in the stock in both scenarios? As in, 19 times more than the money we're arguing about.
I hate it when people in hindsight chew up management for buying at the same ridiculous stock price at which they (the critics) were holding the stock and looking forward to new heights. Management should not be market timers of their own stock. Whatever the market price is, that's a good price. They should not take on the yoke of regular dividends (at the possible cost of expensive financing later) or sacrifice my tax efficiency just so that they don't get blamed for the prices they bought. It's a price where I myself am holding the stock, so I'd know who's to blame if I believed in such things.
Re: Dividend yield is a lot less important than buyback yield
The last thing I want is to put stock buying signals in the hands of company management. Note that I said signals, not the buys themselves, to which I declared myself neutral.market timer wrote:I think we both agree that dividends vs. share buybacks signal different things. Dividends appear to be a stronger statement by management about the sustainability of earnings.
In the current tax regimen, the dividend signals to me that the company cares more about appeasing the feelings of certain investors at the expense of the measured tax efficiency of others. I don't do much about it, but given the right funds I would. I am slightly contradicting myself here wrt signals, but that's mostly because I pay taxes, the same reason I decide whether or not to buy munis or not this year without being guilty of market timing.
And yet, if you look at total returns with dividends reinvested and you don't see a difference, this mathematically means that selling shares of the non-dividend payer instead of taking a dividend would have left you in the same place. This makes the hypothesis that dividends protect you from downturns easily testable, and to my knowledge it fails in practice. And this is before taxes.market timer wrote:If you can live off the dividends, you need not sell shares.
Re: Dividend yield is a lot less important than buyback yield
Mebane Faber has written on this subject in 'Shareholder Yield (a better approach to investing)'.
Mebane defines Shareholder Yield = Dividend Yield + Net Buyback Yield + Net Debt Paydown Yield
Thoughts :-
1. The changes in company taxation have distorted what was once a perfectly good valuation measure. DY still works well as a market valuation measure in countries other than the US.
2. A simpler way to find a useful US stockmarket valuation measure, is to forget the longer yield history and eyeball the recent yield history then shift the expected range accordingly.
3. In retirement, as we have discussed, dividends are real money paid to the investor and so welcomed in retirement when stock prices are not throwing off capital gains from which the retiree can draw.
Mebane defines Shareholder Yield = Dividend Yield + Net Buyback Yield + Net Debt Paydown Yield
Thoughts :-
1. The changes in company taxation have distorted what was once a perfectly good valuation measure. DY still works well as a market valuation measure in countries other than the US.
2. A simpler way to find a useful US stockmarket valuation measure, is to forget the longer yield history and eyeball the recent yield history then shift the expected range accordingly.
3. In retirement, as we have discussed, dividends are real money paid to the investor and so welcomed in retirement when stock prices are not throwing off capital gains from which the retiree can draw.
Last edited by magneto on Tue Jun 02, 2015 10:45 am, edited 3 times in total.
'There is a tide in the affairs of men ...', Brutus (Market Timer)
- market timer
- Posts: 6535
- Joined: Tue Aug 21, 2007 1:42 am
Re: Dividend yield is a lot less important than buyback yield
Results of a Google Scholar search with some relevant articles on the topic of dividend signaling:
Jagannathan et al. JFE (2000)
This paper measures the growth in open market stock repurchases and the manner in which stock repurchases and dividends are used by U.S. corporations. Stock repurchases and dividends are used at di!erent times from one another, by di!erent kinds of "rms. Stock repurchases are very pro-cyclical, while dividends increase steadily over time. Dividends are paid by "rms with higher `permanenta operating cash flows, while repurchases are used by firms with higher `temporary, non-operating cash flows. Repurchasing firms also have much more volatile cash flows and distributions. Finally, "rms repurchase stock following poor stock market performance and increase dividends following good performance. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of dividends.
http://fisher.osu.edu/supplements/10/10 ... ensjag.pdf
Brav et al. JFE (2005)
We survey 384 CFOs and Treasurers, and conduct in-depth interviews with an additional two dozen, to determine the key factors that drive dividend and share repurchase policies. We find that managers are very reluctant to cut dividends, that dividends are smoothed through time, and that dividend increases are tied to long-run sustainable earnings but much less so than in the past. Rather than increasing dividends, many firms now use repurchases as an alternative. Paying out with repurchases is viewed by managers as being more flexible than using dividends, permitting a better opportunity to optimize investment. Managers like to repurchase shares when they feel their stock is undervalued and in an effort to affect EPS. Dividend increases and the level of share repurchases are generally paid out of residual cash flow, after investment and liquidity needs are met.
Financial executives believe that retail investors have a strong preference for dividends, in spite of the tax disadvantage relative to repurchases. In contrast, executives believe that institutional investors as a class have no strong preference between dividends and repurchases. In general, management views provide at most moderate support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play only a secondary role. By highlighting where the theory and practice of corporate payout policy are consistent and where they are not, we attempt to shed new light on important unresolved issues related to payout policy in the 21st century.
http://core.ac.uk/download/pdf/6690697.pdf
Skinner JFE (2008)
There have been fundamental changes in corporate dividend policy over the last several decades (Fama and French, 2001; DeAngelo, DeAngelo, and Skinner, 2000). To shed new light on the disappearance of dividends, this paper examines how the relation between earnings and corporate payout policy changes over the last 50 years. Since 1980, two groups of payers emerge: firms that both pay dividends and make repurchases and firms that only make repurchases. For firms that both pay dividends and make repurchases, managers increasingly coordinate dividend and repurchase decisions in a way that maps total payouts into earnings. Because managers use repurchases to pay out earnings increases, this helps to explain why dividend policy becomes increasingly conservative. The large majority of these firms have paid dividends for decades. Earnings do a good job of explaining payouts for firms that only make repurchases as well, suggesting that newer firms without a dividends history use repurchases in place of dividends. Overall, the evidence suggests that corporate earnings now drive total firm payouts – dividends and repurchases – and that repurchases play an increasingly important role, which helps to explain the disappearance of dividends.
http://faculty.chicagobooth.edu/douglas ... chases.pdf
Jagannathan et al. JFE (2000)
This paper measures the growth in open market stock repurchases and the manner in which stock repurchases and dividends are used by U.S. corporations. Stock repurchases and dividends are used at di!erent times from one another, by di!erent kinds of "rms. Stock repurchases are very pro-cyclical, while dividends increase steadily over time. Dividends are paid by "rms with higher `permanenta operating cash flows, while repurchases are used by firms with higher `temporary, non-operating cash flows. Repurchasing firms also have much more volatile cash flows and distributions. Finally, "rms repurchase stock following poor stock market performance and increase dividends following good performance. These results are consistent with the view that the flexibility inherent in repurchase programs is one reason why they are sometimes used instead of dividends.
http://fisher.osu.edu/supplements/10/10 ... ensjag.pdf
Brav et al. JFE (2005)
We survey 384 CFOs and Treasurers, and conduct in-depth interviews with an additional two dozen, to determine the key factors that drive dividend and share repurchase policies. We find that managers are very reluctant to cut dividends, that dividends are smoothed through time, and that dividend increases are tied to long-run sustainable earnings but much less so than in the past. Rather than increasing dividends, many firms now use repurchases as an alternative. Paying out with repurchases is viewed by managers as being more flexible than using dividends, permitting a better opportunity to optimize investment. Managers like to repurchase shares when they feel their stock is undervalued and in an effort to affect EPS. Dividend increases and the level of share repurchases are generally paid out of residual cash flow, after investment and liquidity needs are met.
Financial executives believe that retail investors have a strong preference for dividends, in spite of the tax disadvantage relative to repurchases. In contrast, executives believe that institutional investors as a class have no strong preference between dividends and repurchases. In general, management views provide at most moderate support for agency, signaling, and clientele hypotheses of payout policy. Tax considerations play only a secondary role. By highlighting where the theory and practice of corporate payout policy are consistent and where they are not, we attempt to shed new light on important unresolved issues related to payout policy in the 21st century.
http://core.ac.uk/download/pdf/6690697.pdf
Skinner JFE (2008)
There have been fundamental changes in corporate dividend policy over the last several decades (Fama and French, 2001; DeAngelo, DeAngelo, and Skinner, 2000). To shed new light on the disappearance of dividends, this paper examines how the relation between earnings and corporate payout policy changes over the last 50 years. Since 1980, two groups of payers emerge: firms that both pay dividends and make repurchases and firms that only make repurchases. For firms that both pay dividends and make repurchases, managers increasingly coordinate dividend and repurchase decisions in a way that maps total payouts into earnings. Because managers use repurchases to pay out earnings increases, this helps to explain why dividend policy becomes increasingly conservative. The large majority of these firms have paid dividends for decades. Earnings do a good job of explaining payouts for firms that only make repurchases as well, suggesting that newer firms without a dividends history use repurchases in place of dividends. Overall, the evidence suggests that corporate earnings now drive total firm payouts – dividends and repurchases – and that repurchases play an increasingly important role, which helps to explain the disappearance of dividends.
http://faculty.chicagobooth.edu/douglas ... chases.pdf
Re: Dividend yield is a lot less important than buyback yield
Notice how dividend yield has been so steady at 2% for all those years (aside from the peak at the financial crisis), regardless of interest rate conditions. I wonder why...
Re: Dividend yield is a lot less important than buyback yield
Isn't a hefty buyback environment good for the major stock indexes overall, since there are less shares to go around in major companies?
-
- Posts: 21
- Joined: Tue Mar 24, 2015 11:42 pm
Re: Dividend yield is a lot less important than buyback yield
Most companies don't issue debt to pay dividends - many have done just that to buyback shares
Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares because they don't have profitable projects for which to invest in order to grow earnings
Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares because they don't have profitable projects for which to invest in order to grow earnings
Re: Dividend yield is a lot less important than buyback yield
I'd be more worried if the management, not seeing promising growth opportunities, instead tried some questionable acquisition or started some speculative new product line. Seems to me a share buyback is a pretty good thing for them to do, given the circumstances.SanDiegoFIRE wrote:Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares because they don't have profitable projects for which to invest in order to grow earnings
-
- Posts: 49038
- Joined: Fri May 11, 2007 11:07 am
Re: Dividend yield is a lot less important than buyback yield
The signalling argument is key to this.market timer wrote:I think we both agree that dividends vs. share buybacks signal different things. Dividends appear to be a stronger statement by management about the sustainability of earnings. Whether this is useful for market timing purposes, I'm not sure. Certainly, it appears that one wants to invest more when buybacks are low, but I'm not sure if one should keep cash out of the market specifically for this purpose. To the extent a high dividend yield signals high earnings visibility in the future, I think investors in decumulation phase might want to overweight high dividend payers, as doing so reduces exposure to sequence of returns risk. If you can live off the dividends, you need not sell shares.ogd wrote:* what if you reinvest dividends?
* why not sell the buyback?
* if the answer is, "because mutual fund", why isn't this an easy route for outperformance for a cheap active MF? Treat every buyback as a sell signal.
* if you think cash is a better investment than the stock, why is the other 95% of your money in the stock in both scenarios? As in, 19 times more than the money we're arguing about.
I hate it when people in hindsight chew up management for buying at the same ridiculous stock price at which they (the critics) were holding the stock and looking forward to new heights. Management should not be market timers of their own stock. Whatever the market price is, that's a good price. They should not take on the yoke of regular dividends (at the possible cost of expensive financing later) or sacrifice my tax efficiency just so that they don't get blamed for the prices they bought. It's a price where I myself am holding the stock, so I'd know who's to blame if I believed in such things.
Management knows more about the current business conditions than external shareholders. Paying a dividend either signals that things are going well, or that they don't see better investment opportunities for the firm.
Executive compensation muddies the picture because stock buybacks increase the value of options whereas dividends do not.
I agree that recurring and increasing dividends are a sign of confidence in the company's earnings prospects. Because it costs real money to pay dividends, and doing so does not directly influence management's compensation, it is a "credible signal" so to speak aka "burning your boats".
- nisiprius
- Advisory Board
- Posts: 52219
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Dividend yield is a lot less important than buyback yield
Just as there is a "dividend achievers" index which is tracked by a number of mutual funds and ETFs, including Vanguard Dividend Appreciation Index (VDAIX, VIG), so there are buyback-oriented indexes, such as the NASDAQ US BuyBack Achievers Index and at least two ETFs, Invesco PKW and SPDR SPYB, which track them. PKW has a total of $3 billion in assets.
Many forum postings have professed a belief in the merits of buybacks, and yet to my recollection, I don't remember anyone ever asking about buyback-oriented funds or saying they used them.
If buybacks "meant" the same thing as dividends, they, too, ought to signal the same things about corporate financial health, brightness of prospects, etc. They should have all the properties of dividend funds plus the intrinsic tax advantages too. So, why aren't buyback-oriented funds more popular?
Many forum postings have professed a belief in the merits of buybacks, and yet to my recollection, I don't remember anyone ever asking about buyback-oriented funds or saying they used them.
If buybacks "meant" the same thing as dividends, they, too, ought to signal the same things about corporate financial health, brightness of prospects, etc. They should have all the properties of dividend funds plus the intrinsic tax advantages too. So, why aren't buyback-oriented funds more popular?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
-
- Posts: 2083
- Joined: Wed Mar 31, 2010 12:33 pm
Re: Dividend yield is a lot less important than buyback yield
For me, a company in which I invest isn't a bank holding my money. I want them to do something with the money. Once it is sitting on a pile of cash, management needs to decide what to do with it. See Apple for this situation, recently. So, buying back shares does tend to push up share prices as the float is reduced. But, holding your shares, you've still got to wait and hope for the "greater fool" to come along and buy your shares when it's time to sell. Dividends are immediate cash in your pocket. The goal of all investing is to generate cash. Dividends get there a bit sooner than otherwise. (Of course, you as the investor, need to use those dividends wisely as you could blow them on stupid things perhaps even more easily than the management of a company.)
As for selling shares to generate income, it may perhaps be true that the net effect is identical or even more beneficial than relying on dividend checks, but I imagine for many older investors (who've lived through many market cycles) there is a certain comfort in holding their shares in solid companies and not having to reduce their "principal".
As for selling shares to generate income, it may perhaps be true that the net effect is identical or even more beneficial than relying on dividend checks, but I imagine for many older investors (who've lived through many market cycles) there is a certain comfort in holding their shares in solid companies and not having to reduce their "principal".
-
- Posts: 49038
- Joined: Fri May 11, 2007 11:07 am
Re: Dividend yield is a lot less important than buyback yield
But buybacks don't mean the same thing as dividends, normally.nisiprius wrote:Just as there is a "dividend achievers" index which is tracked by a number of mutual funds and ETFs, including Vanguard Dividend Appreciation Index (VDAIX, VIG), so there are buyback-oriented indexes, such as the NASDAQ US BuyBack Achievers Index and at least two ETFs, Invesco PKW and SPDR SPYB, which track them. PKW has a total of $3 billion in assets.
Many forum postings have professed a belief in the merits of buybacks, and yet to my recollection, I don't remember anyone ever asking about buyback-oriented funds or saying they used them.
If buybacks "meant" the same thing as dividends, they, too, ought to signal the same things about corporate financial health, brightness of prospects, etc. They should have all the properties of dividend funds plus the intrinsic tax advantages too. So, why aren't buyback-oriented funds more popular?
For Warren Buffett they do, and that's why he refuses to pay dividends (tax inefficient).
But in most companies the owners are not the managers, and the managers are not the largest shareholders (whereas with Berkshire Hathaway they are).
So there's different levels of information available to managers vs. shareholders at large. Question is how do managers disclose that? One effective way appears to be by paying dividends-- since these are hard cash, and no amount of accounting trickery will hide that.
A lot of 'value' managers are invested in companies doing share buybacks-- companies that view their capital as a scarce resource which really belongs to their shareholders, and return it at best opportunity.
Re: Dividend yield is a lot less important than buyback yield
It wasn't too long ago, i guess the end of the last century, that stock buy backs were considered stock price manipulation by the company and were therefore illegal.
I can see a dividend in my pocket.
Where exactly do i see the buyback?
I can see a dividend in my pocket.
Where exactly do i see the buyback?
Re: Dividend yield is a lot less important than buyback yield
Ignoring behavioural effects and transaction costs (including taxes), share buybacks and dividends are economically equivalent. A dividend can be converted into a "buyback" by using it to purchase additional shares (increasing your ownership of the firm). Buybacks can be converted into a "dividend" by selling shares.
On the behavioural side of things, dividends are considered a commitment and indicator of stable future earnings, whereas buybacks are often transitory. Share buybacks are more tax efficient if you plan on reinvesting, but dividends will save you transaction costs if you want cash.
You often see metrics such as Shareholder Yield (Dividends + Net Share Buybacks) and Stakeholder Yield (Dividends + Net Share Buybacks + Net Repayment of Debt) used to better represent economic reality.
This helps filter out companies that are supporting unsustainable dividends via debt/share issuance.
On the behavioural side of things, dividends are considered a commitment and indicator of stable future earnings, whereas buybacks are often transitory. Share buybacks are more tax efficient if you plan on reinvesting, but dividends will save you transaction costs if you want cash.
You often see metrics such as Shareholder Yield (Dividends + Net Share Buybacks) and Stakeholder Yield (Dividends + Net Share Buybacks + Net Repayment of Debt) used to better represent economic reality.
This helps filter out companies that are supporting unsustainable dividends via debt/share issuance.
Re: Dividend yield is a lot less important than buyback yield
A buyback reduces the number of outstanding shares, giving you increased ownership of the company and a larger percentage of its future earnings.derosa wrote:I can see a dividend in my pocket. Where exactly do I see the buyback?
-
- Posts: 49038
- Joined: Fri May 11, 2007 11:07 am
Re: Dividend yield is a lot less important than buyback yield
Google up Buffett's explanation to shareholders of buybacks. It has been cited on this Forum.derosa wrote:It wasn't too long ago, i guess the end of the last century, that stock buy backs were considered stock price manipulation by the company and were therefore illegal.
I can see a dividend in my pocket.
Where exactly do i see the buyback?
BH pays no dividends. Since the biggest shareholders are Buffett and Munger and associated parties, they see no need to pay additional taxes by paying dividends to themselves.
Such alignment of interests between executives (and controlling shareholders) and other investors is unfortunately, quite rare.
Re: Dividend yield is a lot less important than buyback yield
No one is arguing that share buybacks are identical to dividends. Of course they're different. But they're very similar, and fundamentally, they are both ways for management to liquidate parts of the company and give the cash to shareholders. If you are looking to invest in a company and are interested in the "income" it provides shareholders, you would be remiss to ignore the buyback yield. Perhaps it may make sense to discount it slightly if you don't trust it as much as the dividend yield. But can a company with a 3% dividend and no buyback be said to be better than a company with a 2% dividend but 4% buyback yield? Many here that are focused solely on dividends would buy the 3% yield over the 2%+4% yield. Even if you discount the buyback yield because you don't trust it, surely a total yield of 6% isn't going to be discounted below 3%.Valuethinker wrote:But buybacks don't mean the same thing as dividends, normally.nisiprius wrote:Just as there is a "dividend achievers" index which is tracked by a number of mutual funds and ETFs, including Vanguard Dividend Appreciation Index (VDAIX, VIG), so there are buyback-oriented indexes, such as the NASDAQ US BuyBack Achievers Index and at least two ETFs, Invesco PKW and SPDR SPYB, which track them. PKW has a total of $3 billion in assets.
Many forum postings have professed a belief in the merits of buybacks, and yet to my recollection, I don't remember anyone ever asking about buyback-oriented funds or saying they used them.
If buybacks "meant" the same thing as dividends, they, too, ought to signal the same things about corporate financial health, brightness of prospects, etc. They should have all the properties of dividend funds plus the intrinsic tax advantages too. So, why aren't buyback-oriented funds more popular?
For Warren Buffett they do, and that's why he refuses to pay dividends (tax inefficient).
But in most companies the owners are not the managers, and the managers are not the largest shareholders (whereas with Berkshire Hathaway they are).
So there's different levels of information available to managers vs. shareholders at large. Question is how do managers disclose that? One effective way appears to be by paying dividends-- since these are hard cash, and no amount of accounting trickery will hide that.
A lot of 'value' managers are invested in companies doing share buybacks-- companies that view their capital as a scarce resource which really belongs to their shareholders, and return it at best opportunity.
I suppose to me it just seems silly to ignore buybacks as much as most dividend investors do. It's ok to not be solely focused on them, but to ignore them completely and pretend they don't exist seems foolish to me and makes me doubt the merit of any dividend or income-based strategy.
-
- Posts: 21
- Joined: Tue Mar 24, 2015 11:42 pm
Re: Dividend yield is a lot less important than buyback yield
You conveniently left out the part where I mention many co's are issuing debt in order to buyback shares.Tanelorn wrote:I'd be more worried if the management, not seeing promising growth opportunities, instead tried some questionable acquisition or started some speculative new product line. Seems to me a share buyback is a pretty good thing for them to do, given the circumstances.SanDiegoFIRE wrote:Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares because they don't have profitable projects for which to invest in order to grow earnings
Even if they don't have to lever up the balance sheet to do a buyback, seems to me issuing a special dividend if they are flush with cash sends the appropriate signal to investors and is the responsible action as a fiduciary - not using excess liquidity to reduce float at bloated prices to prop up the stock out of self-interest.
Re: Dividend yield is a lot less important than buyback yield
fortyofforty wrote:Dividends are immediate cash in your pocket.
If y'all think cash is a better investment than shares at the present market prices, y'all know what to do. With 100% of your money, mind you, not just the 5% we're arguing about.SanDiegoFIRE wrote:Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares
To me, it means that the company is irresponsibly forcing me to pay the IRS rather than deferring taxes, in the name of dividend politics. Whereas the buyback would have left me the option to reinvest the unpaid taxes, while leaving you the option to sell to get your precious cash, often more tax efficiently than the dividend even then, if you have capital losses stashed up.SanDiegoFIRE wrote:Even if they don't have to lever up the balance sheet to do a buyback, seems to me issuing a special dividend if they are flush with cash sends the appropriate signal to investors and is the responsible action as a fiduciary - not using excess liquidity to reduce float at bloated prices to prop up the stock out of self-interest.
As for the debt angle, engaging in regular dividends can easily mean being forced to take on financing later, possibly at higher costs because they no longer get to choose the perfect time in decades to issue debt.
It's a flawed, noisy signal coming from parties that are not at all disinterested in what you do with it. Above all, it's very visible and very elementary and you shouldn't expect to make much money out of it for that reason.Valuethinker wrote:Management knows more about the current business conditions than external shareholders. Paying a dividend either signals that things are going well, or that they don't see better investment opportunities for the firm.
Timely parallel thread: viewtopic.php?f=2&t=166917&newpost=2509613 . Also see my point above (first ogd post) about executives getting their "share" whether through this or other means.Valuethinker wrote:Executive compensation muddies the picture because stock buybacks increase the value of options whereas dividends do not.
Now this is good news. Thanks.market timer wrote: In contrast, executives believe that institutional investors as a class have no strong preference between dividends and repurchases.
-
- Posts: 21
- Joined: Tue Mar 24, 2015 11:42 pm
Re: Dividend yield is a lot less important than buyback yield
making decisions based on taking things to an extreme is a logical fallacy and symptomatic of cognitive biasogd wrote: If y'all think cash is a better investment than shares at the present market prices, y'all know what to do. With 100% of your money, mind you, not just the 5% we're arguing about.
if you are so concerned about your tax liability from dividends you could hold the dividend paying stocks in a tax-deferred accountogd wrote: To me, it means that the company is irresponsibly forcing me to pay the IRS rather than deferring taxes, in the name of dividend politics. Whereas the buyback would have left me the option to reinvest the unpaid taxes, while leaving you the option to sell to get your precious cash, often more tax efficiently than the dividend even then, if you have capital losses stashed up.
As for the debt angle, engaging in regular dividends can easily mean being forced to take on financing later, possibly at higher costs because they no longer get to choose the perfect time in decades to issue debt.
while you have mentioned an exception, whereby a small % of companies may need to issue debt in order to continue to pay a dividend, realistically most companies aren't in such dire financial circumstances with such poor cash flow that they would need to do so - and even then they aren't the ones that would most likely engage in share repurchases to begin with
- nisiprius
- Advisory Board
- Posts: 52219
- Joined: Thu Jul 26, 2007 9:33 am
- Location: The terrestrial, globular, planetary hunk of matter, flattened at the poles, is my abode.--O. Henry
Re: Dividend yield is a lot less important than buyback yield
Continuing on my question of why people don't talk about buyback-oriented funds... I have no idea, but for what it's worth:
Source: Morningstar
Blue: Vanguard Dividend Appreciation Index Fund, tracks the NASDAQ US Dividend Achievers Select Index
Orange: PowerShares Buyback Achievers ETF, PKW, tracks the NASDAQ US BuyBack Achievers™ Index.
It wasn't what I expected. I figured the lack of noise about buyback funds would turn out to be explained by recent underperformance, but no.
On the other hand (and this speaks yet again to the issue of equivalence between dividends and buybacks) dividend funds have a reputation for "downside protection," which seems to be modestly deserved--as in, dropped only 40% when the stock market as a whole dropped 50%--whereas the buyback-focussed fund dropped almost exactly as much as the stock market as a whole. If buybacks are essentially equivalent to dividends, how come?
Source: Morningstar
Blue: Vanguard Dividend Appreciation Index Fund, tracks the NASDAQ US Dividend Achievers Select Index
Orange: PowerShares Buyback Achievers ETF, PKW, tracks the NASDAQ US BuyBack Achievers™ Index.
It wasn't what I expected. I figured the lack of noise about buyback funds would turn out to be explained by recent underperformance, but no.
On the other hand (and this speaks yet again to the issue of equivalence between dividends and buybacks) dividend funds have a reputation for "downside protection," which seems to be modestly deserved--as in, dropped only 40% when the stock market as a whole dropped 50%--whereas the buyback-focussed fund dropped almost exactly as much as the stock market as a whole. If buybacks are essentially equivalent to dividends, how come?
Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness; Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.
Re: Dividend yield is a lot less important than buyback yield
I've made my more elaborate argument above. Blaming the company (usually with hindsight) for buying stock at the same prices you were comfortably holding is unfair. You can apply this to just the 5% buyback, but given the epithets you've been using for the prices ("inflated", "bloated") I can't see why you'd want to hold any shares.SanDiegoFIRE wrote:making decisions based on taking things to an extreme is a logical fallacy and symptomatic of cognitive biasogd wrote: If y'all think cash is a better investment than shares at the present market prices, y'all know what to do. With 100% of your money, mind you, not just the 5% we're arguing about.
The prices have the right to go up after a buyback because they represent more of the company than before. And again, feel free to counter this with sales without (if you had shareholder influence) hurting my tax efficiency.
This is not an option. I don't get to choose (past a certain level) how much tax-deferred space is available to me. Tax efficiency is a big concern for a great many shareholders.SanDiegoFIRE wrote:if you are so concerned about your tax liability from dividends you could hold the dividend paying stocks in a tax-deferred account
The problem is that they might have cash flow now, but not later. Cutting dividends is seen as a big no-no for regular dividend payers, so they often continue to do it for shareholder-political reasons, when they shouldn't.SanDiegoFIRE wrote:while you have mentioned an exception, whereby a small % of companies may need to issue debt in order to continue to pay a dividend, realistically most companies aren't in such dire financial circumstances with such poor cash flow that they would need to do so - and even then they aren't the ones that would most likely engage in share repurchases to begin with
This is in no small part because folks assign such great meaning to the dividend, like a good half of the posters on this thread. It's healthier to be indifferent or mildly averse.
Re: Dividend yield is a lot less important than buyback yield
VDAIX is not a high dividend fund; it pays only slightly more than TSM. If you want to see the protection power of dividends in the recession, try VHDYX (whereby the answer is "none").nisiprius wrote: On the other hand (and this speaks yet again to the issue of equivalence between dividends and buybacks) dividend funds have a reputation for "downside protection," which seems to be modestly deserved--as in, dropped only 40% when the stock market as a whole dropped 50%--whereas the buyback-focussed fund dropped almost exactly as much as the stock market as a whole. If buybacks are essentially equivalent to dividends, how come?
The performance of VDAIX is more of a quality-thing rather than a dividend-thing. Check out its allocation to "consumer defensive".
-
- Posts: 3567
- Joined: Fri Aug 06, 2010 3:42 pm
Re: Dividend yield is a lot less important than buyback yield
SanDiegoFIRE wrote:
Dividends on the other hand directly lower share price and may adversely affect management stock options. Management might well purely for selfish reasons prefer to do buybacks versus dividends to optimize their stock options. The damage comes if purchased shares are generously valued at the time of purchase and a poor long term investment. On the other hand, share buybacks tend to raise share prices and are more tax efficient than dividends for investors. So I believe that buybacks can either work in favor of investors or to their detriment. A lot depends on management's motives and their investment expertise. In sum the record suggests that share repurchases are usually poorly timed, just like investor purchases.
Financial engineering has become a bigger factor in the current historically low interest rate environment. Many companies have issued considerable debt at low rates as part of a financial engineering strategy, either to increase share buybacks, or as in the case of Apple to help pay for increased dividends even when there are massive levels of cash on the balance sheet or simply to have a wad of cash on hand for the uncertain future. I believe that many companies feel that now is a historical opportunity to load up on cash by issuing debt. Little of that money makes its way into new plant and equipment or new jobs, the places where historically it has gone in the past. This reflects management's concerns about future prospects for economic growth and growth in aggregate demand. Financial engineering is easier and more dependable in their view than is a risky new venture in what they still, 5 years into a recovery, believe to be a fragile underlying economy. Although the unemployment rate as reported has declined precipitously, the labor participation rate remains near its all time low and real inflation adjusted wages are now less than they were in 1970.
Garland Whizzer
Share buybacks can be either good or bad. Good when it's done as a wise decision and shares are well priced for future appreciation and bad when done as a form of financial engineering to increase management's compensation. Management salary and bonus payments (due to stock options) tends to be maximized by increasing share price. Share buybacks tend to increase share price by decreasing number of shares and therefore making PE ratio per share more attractive to investors even in the face of earnings that are not increasing. This has played a role in the current bull market which has seen massive gains in share price while the underlying economy has remained tepid for 5 years.Most companies don't issue debt to pay dividends - many have done just that to buyback shares
Dividends on the other hand directly lower share price and may adversely affect management stock options. Management might well purely for selfish reasons prefer to do buybacks versus dividends to optimize their stock options. The damage comes if purchased shares are generously valued at the time of purchase and a poor long term investment. On the other hand, share buybacks tend to raise share prices and are more tax efficient than dividends for investors. So I believe that buybacks can either work in favor of investors or to their detriment. A lot depends on management's motives and their investment expertise. In sum the record suggests that share repurchases are usually poorly timed, just like investor purchases.
Financial engineering has become a bigger factor in the current historically low interest rate environment. Many companies have issued considerable debt at low rates as part of a financial engineering strategy, either to increase share buybacks, or as in the case of Apple to help pay for increased dividends even when there are massive levels of cash on the balance sheet or simply to have a wad of cash on hand for the uncertain future. I believe that many companies feel that now is a historical opportunity to load up on cash by issuing debt. Little of that money makes its way into new plant and equipment or new jobs, the places where historically it has gone in the past. This reflects management's concerns about future prospects for economic growth and growth in aggregate demand. Financial engineering is easier and more dependable in their view than is a risky new venture in what they still, 5 years into a recovery, believe to be a fragile underlying economy. Although the unemployment rate as reported has declined precipitously, the labor participation rate remains near its all time low and real inflation adjusted wages are now less than they were in 1970.
Garland Whizzer
Re: Dividend yield is a lot less important than buyback yield
Doesn't the wealth of all shareholders (like you and me) tend to get maximized by increasing the share price? I have no problem with any legal and ethical means to increase the share price.garlandwhizzer wrote: Management salary and bonus payments (due to stock options) tends to be maximized by increasing share price.
How can this be? The company has to use real money to buy back the shares. That money would be generating earnings in the meantime. So, you reduce earnings by using real money to buy shares, and you reduce the shares outstanding. I don't see how this can magically increase the share price. If it were to do so, then we would see all companies buy back shares and continuously drive the share prices higher (until the company had no assets, nor any shares left).Share buybacks tend to increase share price by decreasing number of shares and therefore making PE ratio per share more attractive to investors even in the face of earnings that are not increasing.
I have no problem with share repurchases, and I consider them a more tax-friendly way to return funds to shareholders that cannot be profitably invested in growth.
Best wishes.
Andy
Re: Dividend yield is a lot less important than buyback yield
If you're a shareholder in a company, you're trusting that the company is going to be a good steward of your money. I don't understand the logic in saying "I trust the company to manage 95% of the money I put in it, but I want 5% of it returned as cash." I want 100% of my money invested at all times if possible. If I trust a company to invest in it, I want them to actually invest my money. They should only return money if they have literally nothing better to do with it. And if that's the case, I want them to return it to me in the most tax efficient way possible.
Dividend chasing made sense in the 19th century or the first half of the 20th century. Commissions for selling a stock could be the equivalent of $500 in today's dollars. It didn't make sense to spend $500 to sell enough shares to give yourself $1000. It made more sense to buy a company that pays dividends and just use the dividends. No transaction fees.
But it isn't the 19th century anymore. I can sell exactly $1,000 of my Mutual Fund with absolutely no commission, load or fee. There's no advantage to me convenience-wise as to whether to use a dividend or sell a few shares.
I guess if I don't trust a group of managers to run their company well, why would I invest in that company in the first place?
Dividend chasing made sense in the 19th century or the first half of the 20th century. Commissions for selling a stock could be the equivalent of $500 in today's dollars. It didn't make sense to spend $500 to sell enough shares to give yourself $1000. It made more sense to buy a company that pays dividends and just use the dividends. No transaction fees.
But it isn't the 19th century anymore. I can sell exactly $1,000 of my Mutual Fund with absolutely no commission, load or fee. There's no advantage to me convenience-wise as to whether to use a dividend or sell a few shares.
I guess if I don't trust a group of managers to run their company well, why would I invest in that company in the first place?
Re: Dividend yield is a lot less important than buyback yield
Nisiprius, you ought to join academia and publish a white paper on "buyback factor investing."nisiprius wrote:Continuing on my question of why people don't talk about buyback-oriented funds... I have no idea, but for what it's worth:
Source: Morningstar
Blue: Vanguard Dividend Appreciation Index Fund, tracks the NASDAQ US Dividend Achievers Select Index
Orange: PowerShares Buyback Achievers ETF, PKW, tracks the NASDAQ US BuyBack Achievers™ Index.
It wasn't what I expected. I figured the lack of noise about buyback funds would turn out to be explained by recent underperformance, but no.
On the other hand (and this speaks yet again to the issue of equivalence between dividends and buybacks) dividend funds have a reputation for "downside protection," which seems to be modestly deserved--as in, dropped only 40% when the stock market as a whole dropped 50%--whereas the buyback-focussed fund dropped almost exactly as much as the stock market as a whole. If buybacks are essentially equivalent to dividends, how come?
Seriously, we ought to think in terms of cash returns to shareholders whether they be cash, stock buybacks, or even spin-offs. Hmmm. Food for thought.
A fool and his money are good for business.
-
- Posts: 2083
- Joined: Wed Mar 31, 2010 12:33 pm
Re: Dividend yield is a lot less important than buyback yield
We know. You don't like dividends. You don't like dividend paying companies. If you think you can go down to the grocery and trade stock certificates for salad dressing, you know what to do. Snarkiness works both ways.ogd wrote:fortyofforty wrote:Dividends are immediate cash in your pocket.If y'all think cash is a better investment than shares at the present market prices, y'all know what to do. With 100% of your money, mind you, not just the 5% we're arguing about.SanDiegoFIRE wrote:Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares
Again, feel free to spend your stock certificates. Buy movie tickets with them. Buy a sixpack of beer, even, and sit back and enjoy your stock certificates.ogd wrote:To me, it means that the company is irresponsibly forcing me to pay the IRS rather than deferring taxes, in the name of dividend politics. Whereas the buyback would have left me the option to reinvest the unpaid taxes, while leaving you the option to sell to get your precious cash, often more tax efficiently than the dividend even then, if you have capital losses stashed up.SanDiegoFIRE wrote:Even if they don't have to lever up the balance sheet to do a buyback, seems to me issuing a special dividend if they are flush with cash sends the appropriate signal to investors and is the responsible action as a fiduciary - not using excess liquidity to reduce float at bloated prices to prop up the stock out of self-interest.
-
- Posts: 25625
- Joined: Thu Apr 05, 2007 8:20 pm
- Location: New York
Re: Dividend yield is a lot less important than buyback yield
Historically, most companies have been poor stewards of shareholders money when effecting stock buybacks. Most companies have a canny ability to buy high and sell low. What does "buy high, sell low" entail? Simply, they enter into forward transactions or open market purchases when the average stock price is high and selling low entails issuance of restricted stock units/stock options to insiders (usually senior management) which dilutes the overall effect of the stock buy back - company purchases less shares and issues more shares given the low strike price. The flip side is a strong cash dividend policy as there is no wiggle room to manipulate the earnings per share figures that usually are a key determinant in the calculation of those "oh, so sweet executive compensation plans". A strong cash dividend policy requires two things - cash on hand (usually generated from operations; net earnings) or cash borrowings, the net effect is quite transparent on the financial statements and a written policy on it that is strictly adhered to by the firms board of directors. The stock buy-back plan, eh, very weak from a governance perspective. The board of directors can announce a plan, but then not have to actually execute it at any point in time, it's sort of like saying - "we're thinking of making some additions to our company, but we may or may not actually execute on it". The cash dividend on the other hand is declared and paid. It's set in stone on date of declaration. If the company were to retract the declaration, it would be a strong signal that something is amiss.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
-
- Posts: 25625
- Joined: Thu Apr 05, 2007 8:20 pm
- Location: New York
Re: Dividend yield is a lot less important than buyback yield
You're not investing, you are speculating. When you sell shares, you are in effect saying "let me liquidate my investment now". Holding my shares and taking the cash is me saying "I am making the investment decision to keep my shares and choose to either invest the "boot" or spend it immediately. Proportionately, you sell your $1,000 in shares, I decide to re-invest my $1,000 - who's liquidating and who is investing?toto238 wrote:
I guess if I don't trust a group of managers to run their company well, why would I invest in that company in the first place?
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
Re: Dividend yield is a lot less important than buyback yield
I've made the argument very nicely, yet I get to hear again this "cash in the hand is better than stock in the portfolio" fluff. Don't know how else to make it. Sell your shares and leave us who'd be reinvesting the dividend anyway with extra money at work from deferred taxes.fortyofforty wrote:We know. You don't like dividends. You don't like dividend paying companies. If you think you can go down to the grocery and trade stock certificates for salad dressing, you know what to do. Snarkiness works both ways.ogd wrote:fortyofforty wrote:Dividends are immediate cash in your pocket.If y'all think cash is a better investment than shares at the present market prices, y'all know what to do. With 100% of your money, mind you, not just the 5% we're arguing about.SanDiegoFIRE wrote:Investors should be skeptical that management, who most definitely has a self-interest, is repurchasing (inflated) shares
We should have no problem with companies who buy stock at the market price, as I've said above. It's the market price. I didn't sell at this price, even though I could have. I might be reinvesting dividends at this price anyway.Grt2bOutdoors wrote:Most companies have a canny ability to buy high and sell low. What does "buy high, sell low" entail? Simply, they enter into forward transactions or open market purchases when the average stock price is high and selling low entails issuance of restricted stock units/stock options to insiders (usually senior management) which dilutes the overall effect of the stock buy back - company purchases less shares and issues more shares given the low strike price.
What really happens is that the stock price goes down and people (with hindsight) are all of a sudden upset that the company's decision to return capital through buyback made them, through inaction, have more shares than if they'd received dividends (and not reinvested them, this gets left by the wayside) -- at a market price that they liked back then. If you want to assign blame for holding stock at this price, look in the mirror.
Re: Dividend yield is a lot less important than buyback yield
I'm confused as to why people view share buybacks at "elevated prices" to be destructive.
If you believe a share buyback is destroying value, you are implicitly saying that the company has better uses for cash than its investors. This means that paying a dividend would also destroy value. (This is a pretty straightforward conclusion when you consider that a dividend and a share buyback are economically equivalent).
A related idea is that share buybacks are more frequent at higher valuations, therefore they destroy more value than dividends (which occur regardless of the companies immediate financial position). This is incompatible with the idea of efficient markets in several ways: Firstly, if prices reflect available information then a company cannot be overvalued. Secondly, if share buybacks were associated with overvalued companies that information would be exploited.
I'll be completely straightforward here: Behavioral/taxation/signalling are real. Many other reasons to prefer dividends either require a misunderstanding of basic finance or imply widespread market inefficiencies. Widespread inefficiencies are possible, of course, but we are on bogleheads here...
From what I understand, if you like Dividends, Buffet and Indexing there must be a contradiction somewhere.
If you believe a share buyback is destroying value, you are implicitly saying that the company has better uses for cash than its investors. This means that paying a dividend would also destroy value. (This is a pretty straightforward conclusion when you consider that a dividend and a share buyback are economically equivalent).
A related idea is that share buybacks are more frequent at higher valuations, therefore they destroy more value than dividends (which occur regardless of the companies immediate financial position). This is incompatible with the idea of efficient markets in several ways: Firstly, if prices reflect available information then a company cannot be overvalued. Secondly, if share buybacks were associated with overvalued companies that information would be exploited.
I'll be completely straightforward here: Behavioral/taxation/signalling are real. Many other reasons to prefer dividends either require a misunderstanding of basic finance or imply widespread market inefficiencies. Widespread inefficiencies are possible, of course, but we are on bogleheads here...
From what I understand, if you like Dividends, Buffet and Indexing there must be a contradiction somewhere.
Last edited by 691175002 on Tue Jun 02, 2015 2:28 pm, edited 3 times in total.
- SimpleGift
- Posts: 4477
- Joined: Tue Feb 08, 2011 2:45 pm
Re: Dividend yield is a lot less important than buyback yield
Confounding any direct comparisons between dividend-oriented stocks and buyback-oriented stocks is the fact that the sector composition between these two groups is quite different (chart below). The dividend index tends to be dominated by utilities and financials, while the buyback index is recently dominated by tech, health care and consumer discretionary companies.nisiprius wrote:On the other hand (and this speaks yet again to the issue of equivalence between dividends and buybacks) dividend funds have a reputation for "downside protection," which seems to be modestly deserved--as in, dropped only 40% when the stock market as a whole dropped 50%--whereas the buyback-focused fund dropped almost exactly as much as the stock market as a whole. If buybacks are essentially equivalent to dividends, how come?
So when folks say the buyback index has outperformed the dividend index over time, it may be due to share buybacks, but it could also reflect the general outperformance or underperformance of the underlying industry sectors.
Source: S&P Indices
Re: Dividend yield is a lot less important than buyback yield
Yes, when I sell shares I'm saying "let me liquidate part of my investment now". Which is why I only sell when I actually want to liquidate a portion of my investment. I don't need a company manager to liquidate part of my investment for me and create a taxable event for me against my will.Grt2bOutdoors wrote:You're not investing, you are speculating. When you sell shares, you are in effect saying "let me liquidate my investment now". Holding my shares and taking the cash is me saying "I am making the investment decision to keep my shares and choose to either invest the "boot" or spend it immediately. Proportionately, you sell your $1,000 in shares, I decide to re-invest my $1,000 - who's liquidating and who is investing?toto238 wrote:
I guess if I don't trust a group of managers to run their company well, why would I invest in that company in the first place?
I would prefer it if "dividend politics" were completely eliminated and dividends were replaced completely with buybacks. When I'm accumulating, I'm going to be reinvesting any dividends anyway. When I'm withdrawing, I'm going to withdraw what I want and what I need every month. Not what the company's managers decide. I'll take my taxable events on my own time according to my own plan. I don't need the company managers to decide when to hit me with a bunch of taxes and when not to.
And I object to the idea that a dividend stream is a "safe stream" of income that you know you'll never run out of. You could put you entire savings in a checking account, take out 2% per year, and by definition it would last 50 years. Worried about inflation? Put 100% of it in TIPS. You have 50 years of guaranteed income. No default risk. No market risk.
The dividend rate is will below whatever the true Safe Withdrawal Rate is. And the fact that it is so smooth suggests to me that it is not determined by market forces at all, but rather by corporate politics. Managers will avoid cutting a dividend or do everything they can to raise a dividend even if it's not what's best for the company. This is an inefficiency.
A dividend/income-based strategy pulls a double whammy.
1. It puts people heavily in stocks, a very volatile asset class, which is generally inappropriate for retirees to hold a lot of
2. It forces those people to spend a lot less than they can actually afford to if they were actually doing a SWR
So its a strategy that gives retirees more risk, and less return (in the form of lower income than a SWR would usually provide).
Re: Dividend yield is a lot less important than buyback yield
Is there any reason stock buybacks have to be haphazard and inconsistent? If people prefer dividends because they think it forces the company to distribute its cash to shareholders on something of a set schedule, then why couldn't a company replace their dividend schedule with a commensurate stock buyback schedule? This would seem to alleviate the concerns that stock buybacks are done with poor timing or poor motives.
There's really no logical argument for dividends over buybacks given that a buyback can be converted to a dividend by selling shares and a buyback has favorable tax treatment.
There's really no logical argument for dividends over buybacks given that a buyback can be converted to a dividend by selling shares and a buyback has favorable tax treatment.
-
- Posts: 3567
- Joined: Fri Aug 06, 2010 3:42 pm
Re: Dividend yield is a lot less important than buyback yield
Buying back shares improves commonly followed financial ratios in the absence of any real profit growth. Obviously if management thought that investing in plant, equipment, and jobs would increase profits, they would do so. But they can manipulate stock prices without real profit growth by financial engineering as well.Wagnerjb wrote:
How can this be? The company has to use real money to buy back the shares. That money would be generating earnings in the meantime. So, you reduce earnings by using real money to buy shares, and you reduce the shares outstanding. I don't see how this can magically increase the share price. If it were to do so, then we would see all companies buy back shares and continuously drive the share prices higher (until the company had no assets, nor any shares left).
Hope this explains how share buybacks might increase share price in the absence of real profit growth. Buybacks make ROE, ROA, and PE look more attractive to individuals and computerized programs for stock purchases. Getting rid of employees is another way to improve profits without increased top line revenue growth. Corporate management and their accountants can work the numbers in many ways depending on what outcome they want.From Investopedia:
Improving Financial Ratios
First of all, share buybacks reduce the number of shares outstanding. Once a company purchases its shares, it often cancels them or keeps them as treasury shares and reduces the number of shares outstanding, in the process.
Moreover, buybacks reduce the assets on the balance sheet (remember cash is an asset). As a result, return on assets (ROA) actually increases because assets are reduced; return on equity (ROE) increases because there is less outstanding equity. In general, the market views higher ROA and ROE as positives.
Suppose a company repurchases one million shares at $15 per share for a total cash outlay of $15 million. Below are the components of the ROA and earnings per share (EPS) calculations and how they change as a result of the buyback.
As you can see, the company's cash hoard has been reduced from $20 million to $5 million. Because cash is an asset, this will lower the total assets of the company from $50 million to $35 million. This then leads to an increase in its ROA, even though earnings have not changed. Prior to the buyback, its ROA was 4% ($2 million/$50 million) but after the repurchase, ROA increases to 5.71% ($2 million/$35 million). A similar effect can be seen in the EPS number, which increases from 20 cents ($2 million/10 million shares) to 22 cents ($2 million/9 million shares).
The buyback also helps to improve the company's price-earnings ratio (P/E). The P/E ratio is one of the most well-known and often-used measures of value. At the risk of oversimplification, when it comes to the P/E ratio, the market often thinks lower is better. Based on the P/E ratio as a measure of value, the company is now less expensive than it was prior to the repurchase despite the fact there was no change in earnings.
Garland Whizzer
Re: Dividend yield is a lot less important than buyback yield
Bfwolf said " there is no logical argument for dividends over buybacks".
Well there is one. Whenever the intrinsic value of a stock is greater than the current market price, the seller of the stock losses money.
So in a down market, you will lose money every time you manufacture a divided by selling your stock. In fact, the only time a company should do a buyback is when the market price is below intrinsic value. At those time, sellers lose and holders of the stock win.
TJSI
Well there is one. Whenever the intrinsic value of a stock is greater than the current market price, the seller of the stock losses money.
So in a down market, you will lose money every time you manufacture a divided by selling your stock. In fact, the only time a company should do a buyback is when the market price is below intrinsic value. At those time, sellers lose and holders of the stock win.
TJSI
Re: Dividend yield is a lot less important than buyback yield
You're invoking the concept of "intrinsic value" which is extremely debatable. Who decides what is the actual intrinsic value of a security? It's not just a question of imperfect information, though that's huge. But it's also a question of changing preferences as people find themselves more or less risk averse. When everyone starts feeling less risk averse, they start bidding the price up higher as they are willing to accept more risk for a lower return. Then when people become more risk averse, they start selling or refuse to buy as it takes a significant expected return to convince them to take any market risk.TJSI wrote:Bfwolf said " there is no logical argument for dividends over buybacks".
Well there is one. Whenever the intrinsic value of a stock is greater than the current market price, the seller of the stock losses money.
So in a down market, you will lose money every time you manufacture a divided by selling your stock. In fact, the only time a company should do a buyback is when the market price is below intrinsic value. At those time, sellers lose and holders of the stock win.
TJSI
Even if everyone had perfect information about each company and their growth prospects, you would also need perfect information about how people's risk aversion will change over time.
In this context, "intrinsic value" becomes meaningless. I'm willing to pay $xx for the growth potential of Company XYZ, but you're only willing to pay $x for it. Who's to say which one of us has picked the correct "intrinsic value"?
Re: Dividend yield is a lot less important than buyback yield
But this is quite legitimate. After the buyback you own a greater share of the same business (yes -- absent growth), so it justifies a greater price per share. You did get more business per share (edit: or for your combined share of the co.), which is growth from your perspective. The same as if you'd reinvested a dividend, except with fewer shares.garlandwhizzer wrote:Buying back shares improves commonly followed financial ratios in the absence of any real profit growth. Obviously if management thought that investing in plant, equipment, and jobs would increase profits, they would do so. But they can manipulate stock prices without real profit growth by financial engineering as well.
If you think that the price grows too much, then this is easily taken advantage of, and obvious. So much so that it's highly unlikely to work.
Again, this doesn't address executive compensation which is a separate problem that I talked about above. Like I said, if share price stopped growing it's unlikely that the execs will just roll over and take less money. They would do other things, like this: http://www.share.ca/shareholderdb/propo ... idends/490 .
Last edited by ogd on Tue Jun 02, 2015 6:29 pm, edited 1 time in total.