GAAP wrote: ↑
Thu Jul 05, 2018 11:06 am
My now vague memory from a Finance class in college (1980-ish, and I didn't always show up) was that dividends were THE WAY to drive stock prices for companies. That assumption would play out with today's retirees expecting large dividends and continuing to buy dividend stocks.
It turns out to be true more recently that ANNOUNCING a stock buyback tends to lead to price appreciation. In part because of the theoretical improvement in EPS and in part because of the signaling effect (i.e. the idea that a company is announcing, effectively, that it thinks its stock is "cheap"). And there is never a need to announce the END of a stock repurchase plan or even the failure to complete such a plan.
Announcing a new dividend program or an increase in dividends doesn't generally provide much discernible lift to stocks, but announcing a CUT in dividends generally precedes weak stock returns for all the reasons you might imagine.
As a result of this asymmetry, buybacks may be preferred because they don't "commit" the company to repeating the action in the future in the same way that raising a dividend implicitly does. Plus, announcing
a stock buyback doesn't even commit a company to actually completing
the buyback: monitoring the amount of net share repurchases is generally a bit difficult.
On the other hand, announcing a dividend increase that never actually gets paid would be immediately and widely noted.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch