Comments on Dividend Growth Investor: Dividends versus Share Buybacks/Stock repurchases

When companies repurchase their own shares, they d...

2011-12-21T16:08:53.731-08:00

When companies repurchase their own shares, they decrease the number of outstanding stock available, which theoretically increases the stock value. Some investors consider this to be the most tax efficient method of returning cash to shareholders, since there is no tax on repurchasing shares. These investors seem to forget however that the holders of stock who sold to the company end up paying a capital gains tax on their profit. While not all shareholders sell stocks to companies, which are repurchasing their own stock, the ones that do could end up with a higher tax bill at the end of the day, especially if they were long-term buy and hold investors.

I don't think you quite understand how a share buyback program works.

When a company repurchases shares, it does so on the open market. This does no compel 'buy and hold' investors to sell any of their shares back to the company.

If stock is repurchased when the market value is l...

2011-03-29T08:33:10.478-07:00

If stock is repurchased when the market value is lower than the intrinsic value and re-issued when the market value is higher than the intrinsic value, the company ends up making a profit. This is called treasury stock and profits resulting from this operation are added back to Owner's equity. So, a repurchase is not necessarily a bad thing always. Also, as someone posted earlier, the dividend per share will be higher in subsequent years.

For dividend paying companies, share buyback is a ...

2010-12-29T19:44:57.238-08:00

For dividend paying companies, share buyback is a value in the correct situation. I see no value in non-dividend / growth companies. If a dividend paying company has one-time in-flax of cash (like higher then normal oil prices for ExxonMobil, temporary market share due to recall of a competitors product or due to a sale of some assets), a share repurchase may be better then raising the dividend. If a company repurchases shares, they can pay out the same amount in actual dividends, yet have a higher dividend per share. Win for the company (no extra out-of-pocket) and for the investor (higher dividend per share). They would have used the "extra cash" to permanently increase their dividend per share without having to ensure the higher payout over time. The next time they do raise the dividend amount, the dividend per share would increase even more.

Naturally, this assumes the company can maintain their typical dividend to Free Cash Flow payout ratio after the share repurchase.

Edpin I posted on your blog my disagreements to yo...

2009-06-24T05:31:55.879-07:00

Edpin I posted on your blog my disagreements to your support for a stock dividend payment vs cash.

A cash dividend is always preferable to a stock dividend because with a cash dividend the investor can choose to take their cash in a DRIP format for shares or cash when they need it.
If a person is forced to take shares and wants cash they have to pay a broker fee to get their money.

While I believe that even a stock dividend gets charged taxes it really should be a moot point because long term dividend paying stocks should be in an IRA account. Unless you are needing the money but then again you would need it in cash form not stock.

Dividend in stock is also useful as a special divi...

2009-06-23T19:41:11.451-07:00

Dividend in stock is also useful as a special dividend. Here's my argument for it.

I would rather see a company do just about anythin...

2009-06-23T12:30:40.284-07:00

I would rather see a company do just about anything other than a share buyback - raise the dividend, issuse a special dividend, even pay down debt.

I agree with the shareholder dilution argument - a lot of buybacks merely offset all the extra shares created on behalf of executive management.

Give me dividends or debt reduction every time - buybacks are often just a clever way to funnel a disproportionate amount of the company's profits to the executives.

I view share buybacks as mostly neutral, slightly ...

2009-06-23T05:22:51.940-07:00

I view share buybacks as mostly neutral, slightly positive news.
Sure it helps with overall share value but its rather indirect and the next spot of bad news will push a stock's price down.
I'd have to wonder if the billions spent on share buybacks wouldn't have been better spent on growing the company and increasing stock value with assets.

Another good article DGI.