Article on Dividends (J Clements)

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johnny
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Article on Dividends (J Clements)

Post by johnny » Sun Nov 03, 2019 6:35 am

Recently, I read this interesting article by Jonathan Clements on dividends:

https://humbledollar.com/2019/11/cash-back/

The example that's referenced in the article of GM's value creation and how it was realized over time in terms of dividends was striking. With the current situation (a number of companies with large representation in the SP500 that do not deliver any dividends), does this skew the index when it comes to actual value returned to shareholders?

Also, while bogleheads focus on total return over dividends, I was wondering if this phenomenon impacts how people think about their US vs International allocations. With International averaging around 3% dividend and US at about 2%, it would seem that International may be better aligned to returning value to shareholders over the long term. Thoughts?

livesoft
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Re: Article on Dividends (J Clements)

Post by livesoft » Sun Nov 03, 2019 6:46 am

The article can be simplified to:

An investor that buy shares of a single company and reinvests dividends paid by those shares back into shares of the same company and does not ever ever sell shares of the company does not make any money at all. It really doesn't matter whether the company goes bankrupt in 1, 3, 5, 7, 10, or 20 years or if the investor dies. The investor is left with nothing and made no use of their investment.

Diversification in the form of index funds is good. Selling shares when money is needed is good. Hoarding is not good.
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Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Sun Nov 03, 2019 8:06 am

Buying and holding an S&P 500 index fund for a lifetime and reinvesting its dividends, you are taking money from dividend paying companies and buying more shares of all companies including those without dividends - like Amazon. Dividends are neither good nor bad. It is simply one way a public company returns value to its shareholders. The other being buybacks or reinvesting in the companies growth. Aside from the tax consequences, dividends are mental bucketing of money and have no specific advantage. If you do not reinvest the dividends and use the cash for spending, this is no different then selling some share of the S&P 500 index as you are reducing in both cases compounded gains over time. As far as international is concerned, the dividend applies the same. Look at total return, not dividend yield in isolation. Also, the dividend yield is not what an American investor will get. After exchange rates, withholding taxes and higher fees in both expense ratio and transactional costs, it is almost always less then the stated yield.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

RAchip
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Re: Article on Dividends (J Clements)

Post by RAchip » Sun Nov 03, 2019 10:26 am

The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.

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Re: Article on Dividends (J Clements)

Post by Ocean77 » Sun Nov 03, 2019 10:45 am

I think the article makes good sense. History shows that virtually every company will eventually go out of business, sooner or later. Dividends are therefore the only return investors get from the investment in the long run. If we look forward, this also means that the current value of any company today should be the sum of all the dividends that company is expected to pay out over its remaining life, nothing more and nothing less. Future dividends need to be discounted of course.

This insight won't help us in a practical way to calculate the value of a company, since we won't know how much if any dividends a company will pay, how long the company will still exist, and at what interest rate one should discount future dividends. But it may give one pause before investing heavily in those big growth companies that pay little or no dividend today, or the S&P 500 which is tilted towards those companies. There is a reason why value investing has worked so well in the past - those companies typically pay out more dividends.

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Re: Article on Dividends (J Clements)

Post by nedsaid » Sun Nov 03, 2019 10:57 am

I am pretty well bruised and battered after fighting the dividend wars here on Bogleheads. Larry Swedroe fought through many a thread here on Bogleheads as part of his crusade that dividends don't matter. I don't know, I have always liked dividends and have preferred stocks that pay them, of the 22 stocks that I own individually, 21 pay dividends. I do like receiving income from my equity investments and as I get older this matters more and more to me. Lots of good threads out there on this topic.
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Re: Article on Dividends (J Clements)

Post by grok87 » Sun Nov 03, 2019 12:10 pm

johnny wrote:
Sun Nov 03, 2019 6:35 am
Recently, I read this interesting article by Jonathan Clements on dividends:

https://humbledollar.com/2019/11/cash-back/

The example that's referenced in the article of GM's value creation and how it was realized over time in terms of dividends was striking. With the current situation (a number of companies with large representation in the SP500 that do not deliver any dividends), does this skew the index when it comes to actual value returned to shareholders?

Also, while bogleheads focus on total return over dividends, I was wondering if this phenomenon impacts how people think about their US vs International allocations. With International averaging around 3% dividend and US at about 2%, it would seem that International may be better aligned to returning value to shareholders over the long term. Thoughts?
thanks.
looking as amazon as an example, there are lots of reasons to question it from say a warren buffet perspective or perhaps equivalently Novy-Marx; Gross Profitabilty and "Investment"

Gross profitability is probably low compared to other companies
"investment" is probably very high- they are always having to spend money on delivery- last mile etc.

so the question is- why does Buffet like it?
https://www.cnbc.com/2019/08/14/warren- ... rcent.html
RIP Mr. Bogle.

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JoMoney
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Re: Article on Dividends (J Clements)

Post by JoMoney » Sun Nov 03, 2019 12:32 pm

FTSE All World vs FTSE All World "High Dividend"
Image
These things wax and wane over time, but I don't see any extra value being returned based on dividends.

Vanguard's Equity Income fund (a conservative dividend focused active fund) vs. Vanguard 500 Fund
Image
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Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Sun Nov 03, 2019 1:12 pm

JoMoney wrote:
Sun Nov 03, 2019 12:32 pm
FTSE All World vs FTSE All World "High Dividend"
Image
These things wax and wane over time, but I don't see any extra value being returned based on dividends.

Vanguard's Equity Income fund (a conservative dividend focused active fund) vs. Vanguard 500 Fund
Image
The proof is in the pudding.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Sun Nov 03, 2019 1:24 pm

RAchip wrote:
Sun Nov 03, 2019 10:26 am
The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.
Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

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Re: Article on Dividends (J Clements)

Post by MathIsMyWayr » Sun Nov 03, 2019 1:58 pm

On an individual investor level, total return counts, not dividends. On the entire aggregate investors' level, the only gain is dividends flowing out from companies. Share price appreciation is a zero sum.

RAchip
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Re: Article on Dividends (J Clements)

Post by RAchip » Sun Nov 03, 2019 1:59 pm

Ferdinand2014 wrote:
Sun Nov 03, 2019 1:24 pm
RAchip wrote:
Sun Nov 03, 2019 10:26 am
The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.
Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
Can you explain how buybacks “return value” to stockholders?

I dont agree with you on dividends but Im tired of explaining that.

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Re: Article on Dividends (J Clements)

Post by Ocean77 » Sun Nov 03, 2019 3:50 pm

JoMoney wrote:
Sun Nov 03, 2019 12:32 pm
FTSE All World vs FTSE All World "High Dividend"
Image
These things wax and wane over time, but I don't see any extra value being returned based on dividends.

Vanguard's Equity Income fund (a conservative dividend focused active fund) vs. Vanguard 500 Fund
Image
Yep. And what's more, I'm sure that last decade wasn't the only one where growth stocks dominated. If we search long enough, we might find another one.

Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Sun Nov 03, 2019 4:14 pm

RAchip wrote:
Sun Nov 03, 2019 1:59 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 1:24 pm
RAchip wrote:
Sun Nov 03, 2019 10:26 am
The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.
Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
Can you explain how buybacks “return value” to stockholders?

I dont agree with you on dividends but Im tired of explaining that.

Buybacks reduce the number of outstanding shares and therefore on aggregate increase the earnings per share. Plus you avoid taxes until you sell. This increases compounded return over time, especially as compared to dividends in taxable. Berkshire Hathaway has never declared a dividend. You would have earned a compound annual gain of 18.7% without a single dividend.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

RAchip
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Re: Article on Dividends (J Clements)

Post by RAchip » Sun Nov 03, 2019 6:50 pm

Ferdinand2014 wrote:
Sun Nov 03, 2019 4:14 pm
RAchip wrote:
Sun Nov 03, 2019 1:59 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 1:24 pm
RAchip wrote:
Sun Nov 03, 2019 10:26 am
The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.
Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
Can you explain how buybacks “return value” to stockholders?

I dont agree with you on dividends but Im tired of explaining that.

Buybacks reduce the number of outstanding shares and therefore on aggregate increase the earnings per share. Plus you avoid taxes until you sell. This increases compounded return over time, especially as compared to dividends in taxable. Berkshire Hathaway has never declared a dividend. You would have earned a compound annual gain of 18.7% without a single dividend.
So buybacks return value to me because they increase EPS which in turn increases the stock price because stocks generally trade based on a multiple of EPS? If that is true, dividends are far superior because they are free money. Dividends do not reduce EPS and therefore under your theory, should not reduce market price and would be free money.

The fact of the matter is that buybacks do not “return value” to stockholders. Buybacks are just a corporate transaction that MIGHT or MIGHT NOT increase market price. Whatever impact they have on market price, that only impacts stockholders who sell.

Brian2d
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Re: Article on Dividends (J Clements)

Post by Brian2d » Sun Nov 03, 2019 6:56 pm

RAchip wrote:
Sun Nov 03, 2019 10:26 am
Buybacks are a scam and in no way comparable to dividends.
Tell that to Warren Buffet. Absent taxes and the impact of the decision on buyback vs dividend itself, buybacks have the same impact as dividends on the company's value regardless of the stocks valuation relative to intrinsic value.

Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each.

Let's say I held 10 shares worth $100.
If I wanted to sell 1/10 of my holdings: Dividend- I pocket the dividend and now have $10 cash and 10 shares worth $9 for $90 in stock.
Buyback- I sell 1 share, have $10 cash, and have 9 shares worth $10 for $90 in stock

If I do not want to sell at all:
Dividend: I get $10 cash, and now by 10/9 of a share at $9 for $10. I now have $100 stock over 11 1/9 shares.
Buyback: I don't sell. I now have $100 stock over 10 shares.

Only difference is the share amount. If you want to sell, sell. If you don't want to sell, don't. But absent tax impact, your decision to sell shouldn't be made by whether or not the company pays a dividend.

I agree that buybacks are suboptimal when stocks are overvalued. But so is a dividend.

Use the example above. Let's say the intrinsic value of the company is $300. The intrinsic value of equity is therefore $100, not $200. Absent a dividend or buyback, the company's stock would at some point drop to intrinsic value and drop in value by 50%.
With a buyback or dividend, the intrinsic value reduces by the same amount. The company's intrinsic value after the buyback is now $280 (with $80 in shareholder equities). So after the buyback or dividend, when the price returns to intrinsic value, the stock would go down in value by $100, but $100/$180 = 55.5% decrease. I did not avoid this extra decrease because the company paid a dividend instead of buying back stock.

In this case the company could instead add value for existing shareholders buy issuing shares and then buying them back (Either via buyback or dividend) when stock prices returned to intrinsic value.

Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Sun Nov 03, 2019 7:01 pm

RAchip wrote:
Sun Nov 03, 2019 6:50 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 4:14 pm
RAchip wrote:
Sun Nov 03, 2019 1:59 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 1:24 pm
RAchip wrote:
Sun Nov 03, 2019 10:26 am
The article says that Microsoft’s best days are behind it. What a joke.

As for buybacks, everyone keeps saying they are a way of returning value to stockholders. I disagree. If I dont sell, I am not getting any value. I understand the argument that buybacks MIGHT increase market price. But they might not (they wont if the company is buying back at prices in excess of intrinsic value). And even if they do bump up market price (meaning those that sold got a bad deal) that only benefits me if I sell. Buybacks are a scam and in no way comparable to dividends.
Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
Can you explain how buybacks “return value” to stockholders?

I dont agree with you on dividends but Im tired of explaining that.

Buybacks reduce the number of outstanding shares and therefore on aggregate increase the earnings per share. Plus you avoid taxes until you sell. This increases compounded return over time, especially as compared to dividends in taxable. Berkshire Hathaway has never declared a dividend. You would have earned a compound annual gain of 18.7% without a single dividend.
So buybacks return value to me because they increase EPS which in turn increases the stock price because stocks generally trade based on a multiple of EPS? If that is true, dividends are far superior because they are free money. Dividends do not reduce EPS and therefore under your theory, should not reduce market price and would be free money.

The fact of the matter is that buybacks do not “return value” to stockholders. Buybacks are just a corporate transaction that MIGHT or MIGHT NOT increase market price. Whatever impact they have on market price, that only impacts stockholders who sell.
It is not my theory. I am simply stating the math. Your understanding of dividends is incorrect however. Brian2d's explanation and Joe Money's graphs I think do an excellent job of explaining value of being a shareholder, whether from dividends, buybacks, or intrinsic growth from reinvestment.
Last edited by Ferdinand2014 on Sun Nov 03, 2019 7:07 pm, edited 1 time in total.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

Brian2d
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Re: Article on Dividends (J Clements)

Post by Brian2d » Sun Nov 03, 2019 7:06 pm

Ferdinand2014 wrote:
Sun Nov 03, 2019 7:01 pm
RAchip wrote:
Sun Nov 03, 2019 6:50 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 4:14 pm
RAchip wrote:
Sun Nov 03, 2019 1:59 pm
Ferdinand2014 wrote:
Sun Nov 03, 2019 1:24 pm


Companies return value to the shareholder by 3 ways: dividends, buybacks, or reinvest capital to expand, improve productivity or acquisitions. All methods can be good or bad depending on how the management deploys its cash. Buying back company shares with unwarranted leverage or above intrinsic value may be a bad choice. Then again, increasing dividends when cash flow is poor or better return on investment can be had elsewhere is just as bad. None of the 3 options are either good or bad. It depends on how they are deployed. If your return on investment is greater then $1 for every $1 deployed, it was a good choice. If it wasn't then it is not. I agree if you do not sell you gain no value. Dividends do not give a net increase in value as the share price drops exactly by the amount of dividend paid. Only by redeploying them into more shares or into another investment (rather then spending it) will result in any compounded value gain over time. Just like buybacks or company reinvestment.
Can you explain how buybacks “return value” to stockholders?

I dont agree with you on dividends but Im tired of explaining that.

Buybacks reduce the number of outstanding shares and therefore on aggregate increase the earnings per share. Plus you avoid taxes until you sell. This increases compounded return over time, especially as compared to dividends in taxable. Berkshire Hathaway has never declared a dividend. You would have earned a compound annual gain of 18.7% without a single dividend.
So buybacks return value to me because they increase EPS which in turn increases the stock price because stocks generally trade based on a multiple of EPS? If that is true, dividends are far superior because they are free money. Dividends do not reduce EPS and therefore under your theory, should not reduce market price and would be free money.

The fact of the matter is that buybacks do not “return value” to stockholders. Buybacks are just a corporate transaction that MIGHT or MIGHT NOT increase market price. Whatever impact they have on market price, that only impacts stockholders who sell.
It is not my theory. I am simply stating the math. Your understanding of dividends is incorrect however.
Ferdinand is 100% correct. Buybacks return value to shareholders just as much as dividends. The only question is whether the cash payments go to those who choose to sell the shares or to everyone equally.

Imagine a company that redeems it's entire equity balance. It has 10 outstanding shares worth $100 each for total equity worth $1,000.

Dividend approach: The company distributes $100 per share. Now there are 10 outstanding shares that are worth $0.
Buyback approach: The company buys back the 10 shares at $100 a piece. Now there are 0 outstanding shares and no equity.

The people who held the shares got paid out by the company either way.

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Re: Article on Dividends (J Clements)

Post by ruud » Sun Nov 03, 2019 7:58 pm

Brian2d wrote:
Sun Nov 03, 2019 7:06 pm
Imagine a company that redeems it's entire equity balance. It has 10 outstanding shares worth $100 each for total equity worth $1,000.

Buyback approach: The company buys back the 10 shares at $100 a piece. Now there are 0 outstanding shares and no equity.
I know this was a theoretical/hypothetical scenario, but who would own/control the company after such a transaction? Would it even be possible?
"A good plan, violently executed now, is better than a perfect plan next week."

Brian2d
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Re: Article on Dividends (J Clements)

Post by Brian2d » Sun Nov 03, 2019 8:04 pm

ruud wrote:
Sun Nov 03, 2019 7:58 pm
Brian2d wrote:
Sun Nov 03, 2019 7:06 pm
Imagine a company that redeems it's entire equity balance. It has 10 outstanding shares worth $100 each for total equity worth $1,000.

Buyback approach: The company buys back the 10 shares at $100 a piece. Now there are 0 outstanding shares and no equity.
I know this was a theoretical/hypothetical scenario, but who would own/control the company after such a transaction? Would it even be possible?
This can be thought of as a company going out of business without going bankrupt after liquidating its holdings and having cash on hand to distribute to its owners. Could also occur in a company selling itself to a larger company for cash. But yes, it's theoretical.

RAchip
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Re: Article on Dividends (J Clements)

Post by RAchip » Sun Nov 03, 2019 8:32 pm

"Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each."

One big flaw in all of this is that you are talking bout book value or asset value. In the real world, book value has little or nothing to do with the market value of most public companies. Book value is really just an accounting entry. It often has absolutely nothing to do with a company's ability to generate future earnings. Market price is usually driven by expectations of a company's future earnings. This is why every company in the DJIA and 80+% of the S&P 500 companies pay dividends -- extra cash held in a company is often given little or no value by the "market". The market is focused on earnings. And earnings drive demand for stocks and demand drives market price. As pointed out above, buybacks increase EPS and, more importantly I think, increase demand for stock and decrease the supply of that stock. The reason companies do buybacks is that buybacks are expected to increase market price. I don't consider increasing market price temporarily by artificially inflating demand to be "returning value" to me. Dividends put cash in my pocket and have little or no impact on stock price over time because the market is focused on earnings in pricing stock. Buybacks offer a speculative hope of increasing market price but put no actual cash in my pocket.

People have mentioned Berkshire/Buffet several times. Berkshire has underperformed the S&P 500 over the last decade. If Berkshire distributed their 100+ billion cash hoard to shareholders, shareholders could deploy that cash on their own and earn a return. They get little or no return on cash that Berkshire is just sitting on.

Brian2d
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Re: Article on Dividends (J Clements)

Post by Brian2d » Sun Nov 03, 2019 10:41 pm

I'm not claiming announcements of dividends and buybacks have exactly the same impact on market value as they could be interpreted differently for signaling purposes and different shareholders may have certain desires for dividend payments. However, you claimed that buybacks are a scam and that they don't return value to shareholders, and that is false. From a cash perspective the amount the company is paying to shareholders (yes, different shareholders) is the same whether it does so via a dividend or a buyback.

Ocean77
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Re: Article on Dividends (J Clements)

Post by Ocean77 » Sun Nov 03, 2019 11:12 pm

Brian2d wrote:
Sun Nov 03, 2019 6:56 pm
Tell that to Warren Buffet. Absent taxes and the impact of the decision on buyback vs dividend itself, buybacks have the same impact as dividends on the company's value regardless of the stocks valuation relative to intrinsic value.

Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each.
Let's run your example if the shares trade at a higher price. Each share may represent $10 in equity, but they may happen to trade at $20. If I own one share, then I would get:
- If the company pays a dividend, I'd get $1, and still have my one share now representing $9 in equity. So a total of $10.
- If the company buys back it's shares, they would get exactly one share for that $20, so the equity per share ($180 / 19 shares) will now be about $9.50.

So in the 2nd case (buyback), I have 50 cents less. Oops!

If you read Warren Buffets shareholder letters (i.e. "The essays of Warren Buffet", compiled by L. Cunningham, highly recommended!), he clearly states that a company that buys back shares at a time when those shares trade above intrinsic value destroys shareholder value.

Ferdinand2014
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Re: Article on Dividends (J Clements)

Post by Ferdinand2014 » Mon Nov 04, 2019 5:47 am

Ocean77 wrote:
Sun Nov 03, 2019 11:12 pm
Brian2d wrote:
Sun Nov 03, 2019 6:56 pm
Tell that to Warren Buffet. Absent taxes and the impact of the decision on buyback vs dividend itself, buybacks have the same impact as dividends on the company's value regardless of the stocks valuation relative to intrinsic value.

Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each.
Let's run your example if the shares trade at a higher price. Each share may represent $10 in equity, but they may happen to trade at $20. If I own one share, then I would get:
- If the company pays a dividend, I'd get $1, and still have my one share now representing $9 in equity. So a total of $10.
- If the company buys back it's shares, they would get exactly one share for that $20, so the equity per share ($180 / 19 shares) will now be about $9.50.

So in the 2nd case (buyback), I have 50 cents less. Oops!

If you read Warren Buffets shareholder letters (i.e. "The essays of Warren Buffet", compiled by L. Cunningham, highly recommended!), he clearly states that a company that buys back shares at a time when those shares trade above intrinsic value destroys shareholder value.
I have read every single shareholder letter as well as the book you refer. All forms of capital deployment (dividends, buybacks, reinvestment) are intrinsically agnostic from a shareholder perspective. It is how they are deployed that effect shareholder value. They are all neither good or bad as a method of shareholder value return. Buffett is very clear that any of the 3 possible deployments make sense only if for every $1 deployed return greater then $1 of return to the shareholder. He views buybacks in a positive light like any of the other 2 possible uses of cash if they are deployed effectively.
“You only find out who is swimming naked when the tide goes out.“ — Warren Buffett

B. Wellington
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Re: Article on Dividends (J Clements)

Post by B. Wellington » Mon Nov 04, 2019 7:51 am

nedsaid wrote:
Sun Nov 03, 2019 10:57 am
I am pretty well bruised and battered after fighting the dividend wars here on Bogleheads. Larry Swedroe fought through many a thread here on Bogleheads as part of his crusade that dividends don't matter. I don't know, I have always liked dividends and have preferred stocks that pay them, of the 22 stocks that I own individually, 21 pay dividends. I do like receiving income from my equity investments and as I get older this matters more and more to me. Lots of good threads out there on this topic.
+1

"We tend to favor companies that send us a check every (year)"....Charlie Munger.

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nedsaid
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Re: Article on Dividends (J Clements)

Post by nedsaid » Mon Nov 04, 2019 10:05 am

RAchip wrote:
Sun Nov 03, 2019 8:32 pm
"Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each."

One big flaw in all of this is that you are talking bout book value or asset value. In the real world, book value has little or nothing to do with the market value of most public companies. Book value is really just an accounting entry. It often has absolutely nothing to do with a company's ability to generate future earnings. Market price is usually driven by expectations of a company's future earnings. This is why every company in the DJIA and 80+% of the S&P 500 companies pay dividends -- extra cash held in a company is often given little or no value by the "market". The market is focused on earnings. And earnings drive demand for stocks and demand drives market price. As pointed out above, buybacks increase EPS and, more importantly I think, increase demand for stock and decrease the supply of that stock. The reason companies do buybacks is that buybacks are expected to increase market price. I don't consider increasing market price temporarily by artificially inflating demand to be "returning value" to me. Dividends put cash in my pocket and have little or no impact on stock price over time because the market is focused on earnings in pricing stock. Buybacks offer a speculative hope of increasing market price but put no actual cash in my pocket.

People have mentioned Berkshire/Buffet several times. Berkshire has underperformed the S&P 500 over the last decade. If Berkshire distributed their 100+ billion cash hoard to shareholders, shareholders could deploy that cash on their own and earn a return. They get little or no return on cash that Berkshire is just sitting on.
Keep in mind that the market pays attention to cash on the balance sheet. More cash on the balance sheet tends towards higher P/E ratios. When a company goes ex-dividend, all other things being equal, the stock price will drop by the amount of the dividend. So dividends are not "free money." But they do represent cash returned to shareholders. There are diminishing returns over time of a business reinvesting its excess cash into its business, there gets to be a point where it is better to return excess cash to shareholders than to engage in silly and value destroying acquisitions. Sometimes acquisitions work out, more often they just destroy value. I would rather have the cash than endure management silliness.
A fool and his money are good for business.

Ocean77
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Re: Article on Dividends (J Clements)

Post by Ocean77 » Mon Nov 04, 2019 10:40 am

Ferdinand2014 wrote:
Mon Nov 04, 2019 5:47 am
Ocean77 wrote:
Sun Nov 03, 2019 11:12 pm
Brian2d wrote:
Sun Nov 03, 2019 6:56 pm
Tell that to Warren Buffet. Absent taxes and the impact of the decision on buyback vs dividend itself, buybacks have the same impact as dividends on the company's value regardless of the stocks valuation relative to intrinsic value.

Assuming no taxes and no impact of management's decision on buyback vs dividends on the market's reading of a stock, the two are equivalent.
Let's say a company has $400 in assets, $200 in liabilities, and $200 in shareholder equity. It now distributes $20 either as a dividend or a buyback. The company now has $380 in assets, $200 in liabilities, and $180 in shareholder equity, regardless of how that was distributed. Let's assume the company previously had 20 shares of $10 each. In the dividend example, there is now 20 outstanding shares worth $9 each. In the buyback example, there are now 18 shares worth $10 each.
Let's run your example if the shares trade at a higher price. Each share may represent $10 in equity, but they may happen to trade at $20. If I own one share, then I would get:
- If the company pays a dividend, I'd get $1, and still have my one share now representing $9 in equity. So a total of $10.
- If the company buys back it's shares, they would get exactly one share for that $20, so the equity per share ($180 / 19 shares) will now be about $9.50.

So in the 2nd case (buyback), I have 50 cents less. Oops!

If you read Warren Buffets shareholder letters (i.e. "The essays of Warren Buffet", compiled by L. Cunningham, highly recommended!), he clearly states that a company that buys back shares at a time when those shares trade above intrinsic value destroys shareholder value.
I have read every single shareholder letter as well as the book you refer. All forms of capital deployment (dividends, buybacks, reinvestment) are intrinsically agnostic from a shareholder perspective. It is how they are deployed that effect shareholder value. They are all neither good or bad as a method of shareholder value return. Buffett is very clear that any of the 3 possible deployments make sense only if for every $1 deployed return greater then $1 of return to the shareholder. He views buybacks in a positive light like any of the other 2 possible uses of cash if they are deployed effectively.
I fully agree. My concern was not that buybacks in general are bad, but that stock valuation (relative to intrinsic value) matters and determines if they do return value to shareholders or not.

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JoMoney
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Re: Article on Dividends (J Clements)

Post by JoMoney » Mon Nov 04, 2019 11:03 am

Yes, valuation matters, but if you don't expect the value to go up you really shouldn't be buying/holding the company or stock portfolio in the first place.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Ocean77
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Re: Article on Dividends (J Clements)

Post by Ocean77 » Mon Nov 04, 2019 3:06 pm

Well I'd much rather hold stock that goes up primarily due to the company growing its business and paying out a dividend that increases over time.

bhsince87
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Re: Article on Dividends (J Clements)

Post by bhsince87 » Mon Nov 04, 2019 3:36 pm

A point often missed in the share buyback discussion, is that each share repurchased means less cash needed for future dividend payouts.

For example, Microsoft, which is planning to buy back about 300,000,000 of its shares.

They are currently paying about $2 a year in dividends per share, so that would be a $600,000,000 per year savings each year going forward.
"If ye love wealth better than liberty, the tranquility of servitude better than the animating contest of freedom, go home from us in peace." Samuel Adams

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