Buy back yield > dividends for years. Did you know?

[Lsbcal]

I knew about buy backs but this table below puts it in better perspective. It brings in the idea of buyback yields which I had not heard of.

I guess buy backs have trumped dividends since 2004:

The declining role of dividends, as a form of cash return, has meant that a more relevant measure of cash return has to incorporate stock buybacks, resulting in a broader definition of cash yield and cash payout ratio measures:

Cash Yield = (Dividends + Buybacks) / Market Capitalization
Cash Payout Ratio = (Dividends + Buybacks)/ Net Income

And note the yields of dividends versus buybacks here:

Good overview article by Carlson here: https://awealthofcommonsense.com/2019/04/dividends-dont-matter-as-much-as-they-used-to/

Full article from Damordian: https://aswathdamodaran.blogspot.com/2019/02/january-2019-data-update-8-dividends.html

 

[Totoro]

Nice overview - thanks. Yes, I knew and I actually support it for tax reasons.

On a more cynical side I'm sure stock options as part of the executive package has nothing to do with buybacks vs. dividends .. the trend also makes the group of 'dividend aristocrat' less meaningful.

 

[OldShooter]

In a perfectly rational world populated by Thaler's "Econs," there would be no dividends. Stock buybacks are a more tax-efficient way to deliver cash to shareholders. "Econs" do nor rule, though, and many "humans" like dividends.

Buybacks' popularity with stock option holders certainly has been a factor in their increasing popularity.

 

[audreyh1]

I just hate seeing companies divert so much income into stock buybacks (to boost share prices short term) that they don’t have the cash they need to survive.

There is an annoying tendency for US companies to buy back their stock when it is most expensive, and then pull back on stock buybacks when their stock drops.

GE is an example of both.
https://www.forbes.com/sites/greats...backs-destroy-shareholder-value/#23ee32da7841

 

[RenoJay]

I’m an old school dividend guy. I give companies credit for creating cool products, but not for buying their own stock only when it’s a good deal. There’s a reason Warren Buffett has excessive profits returned to HQ instead of giving it to the presidents of his divisions to reinvest. (And yes, I know he supports buy backs overall but that’s when the intrinsic value of the business is higher than the stock price only.)

 

[Lsbcal]

Personally I don't put any judgements one way or the other on buy backs. I am kind of surprised that buy backs are somewhat a hot emotional issue for others. And I don't give dividends any special place in the total returns I receive.

I just want to make a good return on my money that I earned through my years labor ... and scheming ... and ...

 

[Sunset]

I just hate seeing companies divert so much income into stock buybacks (to boost share prices short term) that they don’t have the cash they need to survive.

There is an annoying tendency for US companies to buy back their stock when it is most expensive, and then pull back on stock buybacks when their stock drops.

GE is an example of both.
https://www.forbes.com/sites/greats...backs-destroy-shareholder-value/#23ee32da7841

+ 1

 

[Lsbcal]

I think this subject brings up an issue for me about staying unemotional in investments. An analogy might help. When I root for "my" baseball team I am emotionally going to be bothered or not depending on the outcome.

How to stop rooting in investing for any particular asset class or investment approach? I guess it is not really possible since one's money must go somewhere. Unlike the baseball team analogy where I can just ignore the sports page. So I root for stocks in general but not for a particular "team" of stocks.

But I still invest in teams of stocks at any particular time. Hmmm.

 

[GravitySucks]

Then maybe a change in tax rules.
There's a reason stock repurchases were illegal pre 1980s - the practice can be easily abused to manipulate share prices, particularly when bonuses are tied to share price performance. Of course boards and managements are much more ethical now than then.
Outside current tax law I would assume a true Econ would want all profits not required for operations and reasonable expansion to be returned via dividends.

In a perfectly rational world populated by Thaler's "Econs," there would be no dividends. Stock buybacks are a more tax-efficient way to deliver cash to shareholders. "Econs" do nor rule, though, and many "humans" like dividends.

Buybacks' popularity with stock option holders certainly has been a factor in their increasing popularity.

 

[audreyh1]

Buybacks coupled with stock options are a vehicle whereby the executives of a company enrich themselves at the expense of the other shareholders.

Cisco is a good example.

I don't see this as just an emotional issue. The emotions come into play when a company appears misbehaving in terms of corporate governance. Do shareholders ultimately get hurt when corporate executives pull financial engineering stunts or otherwise screw up? Yes they do.

I have no problem with prudent buybacks that don't suck up a huge amount of cashflow, and aren't used to coverup excessive stock option grants. It's when stock buybacks become excessive and are used mainly to prop up the stock price so executives can cash in their shares that I become highly annoyed.

Of course I'm going to be annoyed as a shareholder when I think company executives are screwing up. This is not good for the long-term health of a corporation or their shareholders. GE is classic text book.

I don't hold individual stocks so it's not like I can trade on my opinions.

There's a reason stock repurchases were illegal pre 1980s - the practice can be easily abused to manipulate share prices, particularly when bonuses are tied to share price performance. Of course boards and managements are much more ethical now than then.

Yep - I think what followed showed indeed that the practice is readily abused.

 

[Lsbcal]

Audrey, I agree with what you are saying.

I don't know what the percentage of companies misbehaving in the buyback/options area is with my investment holdings. I suspect that it is low. For instance, it looks like GE is about 0.2% of our portfolio (0.55% of the SP500) and Cisco is somewhat larger.