I am a firm believer in dividend growth investing strategies, where one could purchase a stock in a company that consistently increases its dividends and watch their dividend income rise over time. Dividend investing is a long-term strategy however, as the full impact of the fruits from your investments won’t be felt for several decades.
Successful dividend investing is much more than picking the highest yielding stocks however. Recent history has shown that in most cases, the stocks with the highest yields are the first to cut distributions when trouble arises. In order to be successful at long-term dividend investing, one needs to find the right balance between dividend growth and dividend yield.
There are several stocks, which offer tempting current high yields, which are less likely to be sustained. Most of the companies mentioned below are members of the elite S&P Dividend Aristocrats index for now.
Avery Dennison Corporation is engaged in the production of pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. The Company's segments are Pressure-sensitive Materials, Retail Information Services and Office and Consumer Products. The company last raised its dividend in 2007. Avery Dennison has been unable to cover its dividend payment over the past two quarters. Based off the past 4 quarterly earnings reports however Avery earned $2.16/share and paid out $1.64 in dividends per each unit of common stock. Avery ended its 32-year streak of consistent dividend increases in 2008.
M&T Bank Corporation (M&T) is a bank holding company. The Bank offers a range of commercial banking, trust and investment services to its customers. M&T Bank last raised its dividend in 2007 as well. M&T Bank paid out most of its earnings as dividends over the past 3 quarters and couldn’t cover its distribution in the latest quarter. The bank is also one of the financial institutions, which had taken funds from the US Treasury. M&T Bank took $600 million in TARP money back in December 2008. M&T Bank ended its 27-year streak of consistent dividend increases in 2008.
Leggett & Platt, Incorporated is a diversified manufacturer that conceives designs and produces a range of engineered components and products used in homes, offices, retail stores and automobiles. Leggett & Platt’s dividend was last raised in 2007, which ended the company’s 37-year streak of dividend increases. The company hasn’t been able to even cover its dividend payments by earnings for both 2007 and 2008 fiscal years.
Johnson Controls provides automotive interiors, products and services that optimize energy usage in buildings and batteries for automobiles and hybrid electric vehicles, along with related systems engineering, marketing and service expertise. The Company operates in three businesses: building efficiency, automotive experience and power solutions. The company last raised its dividend in 2007, ending its 33-year streak of consistent dividend raises. Even though Johnson Controls only yields 2.50%, which could hardly be justified as “high yield stock” per se, it has not been able to adequately cover its distributions from its earnings since Q4 2008.
This being said, due to the company’s diversification in location, products and clientele it should be able to withstand the current crisis in the automotive industry. The price of future growth could come at the expense of a dividend cut.
Just because companies have not been able to cover their dividends over the past few quarters doesn’t mean they would necessarily be cut; a rebound in corporate profits could push down payout ratios to more reasonable levels. The lack of dividend increases for more than one year however typically indicates that management does not see an improvement in the company financials over the next two years. Unless dividends are raised by the end of 2009 for the four companies mentioned above, they would certainly be dropped out of the Dividend Aristocrats indexes.
Full Disclosure: None
Relevant Articles:
- Don’t chase High Yielding Stocks Blindly
- High yield stocks for current income
- Why do I like Dividend Aristocrats?
- Dividend Analysis of M&T Bank Corporation (MTB)
- Dividend Stocks to Avoid
Tuesday, June 30, 2009
Monday, June 29, 2009
High Yielding Companies boosting distributions
While some investors viewed Petsmart’s 233% dividend raise as extremely important, I found the increases from several high yield stocks to be very intriguing as well. First of all, as a dividend growth investor my goal is to generate a double digit yield on cost after years of consistent dividend increases by the companies I have included in my portfolio. But what if I could purchase dividend stocks that already spot double-digit dividend distributions? Regular readers of my blog know that I do not like chasing high yielding stocks blindly. My experience with American Capital (ACAS), which suspended its dividend is a lesson that will never be forgotten. Despite the fact that the company recently announced a dividend of $1.07/share in order to maintain its status of a business development company, 90% of which would be paid in additional shares and the rest in cash, the company faces troubles with its creditors.
Two of the companies that raised distributions, American Capital Agency Corp. and Hatteras Financial Corp. have fluctuating dividend payments. The other one, Prospect Capital has raised distributions for 19 consecutive quarters. Most of these distributions consist of earnings and returns of capital. Companies could only afford paying such distributions by selling additional stock and raising more money by selling additional debt in order to grow and sustain operations.
The double digit current yields, also show investors pricing in a high probability of a dividend cut.
Well let’s look at last weeks dividend increases first:
Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity, boosted its quarterly distributions to $1.10 per share. This represents a 4.8% increase for this real estate investment trust compared to its previous distribution. Hatteras Financial Corp. has a fluctuating dividend payment, which has ranged between $0.75 and $1.05 per share. The stock currently yields 15.90%.
Duke Energy (DUK), which operates as an energy company in the Americas, raised its quarterly dividend to 24 cents per share, which represented an increase of $0.01 over the previous level. It appears that Duke Energy has regularly increased its quarterly dividend since 2005, accounting for spinning off its natural gas transmission and storage business into Spectra Energy in 2007. The stock currently yields 6.60%.
American Capital Agency Corp. (AGNC), which invests in agency securities for which the principal and interest payments are guaranteed by a U.S. Government agency, increased its quarterly dividend to $1.50 per share, up from the previous distribution of $0.85/share. The stock currently yields 25.40%.
Prospect Capital Corporation (PSEC), which is a closed-end investment company that lends to and invests in private and microcap public businesses, increased its quarterly dividend to 40.625 cents per share. This dividend marks Prospect Capital's 19th consecutive quarterly increase. The company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. The stock currently yields 16.90%.
PetSmart, Inc. (PETM), which provides products, services, and solutions for pets in North America., increased its quarterly dividend by a staggering 233% to 10 cents per share. The company’s Board of Directors also authorized a $350 million stock purchase plan that expires in January 2012. PetSmart, Inc. initiated a dividend payment policy in 2003 at 2 cents/share. The company has increased its dividend only once , in 2004 to 3 cents/share and kept it unchanged since, until the most recent increase. The stock currently yields 1.90%.
Darden Restaurants Inc. (DRI), which engages in the ownership and operation of full-service restaurants in the United States and Canada, increased its quarterly dividend by 25% to 25 cents per share. Darden Restaurants Inc has consistently increased its quarterly since 2005. The stock currently yields 3.10%.
As usual there’s not free lunch on Wall Street. Thus, before getting too excited about the high yielding dividend raisers from last week, research them carefully and make sure you understand how their business model works. In a market where cash is king, relying on the capital markets to fund growth could turn very expensive if done at the wrong moment.
Full Disclosure: None
Relevant Articles
- High yield stocks for current income
- Dividend Cuts - the worst nightmare for dividend investors
- Don’t chase High Yielding Stocks Blindly
- General Motors (GM) bankruptcy trade
- ACAS Dividend News
Two of the companies that raised distributions, American Capital Agency Corp. and Hatteras Financial Corp. have fluctuating dividend payments. The other one, Prospect Capital has raised distributions for 19 consecutive quarters. Most of these distributions consist of earnings and returns of capital. Companies could only afford paying such distributions by selling additional stock and raising more money by selling additional debt in order to grow and sustain operations.
The double digit current yields, also show investors pricing in a high probability of a dividend cut.
Well let’s look at last weeks dividend increases first:
Hatteras Financial Corp. (HTS), which invests in adjustable-rate and hybrid adjustable-rate single-family residential mortgage pass-through securities guaranteed or issued by the United States Government agency, or by the United States Government-sponsored entity, boosted its quarterly distributions to $1.10 per share. This represents a 4.8% increase for this real estate investment trust compared to its previous distribution. Hatteras Financial Corp. has a fluctuating dividend payment, which has ranged between $0.75 and $1.05 per share. The stock currently yields 15.90%.
Duke Energy (DUK), which operates as an energy company in the Americas, raised its quarterly dividend to 24 cents per share, which represented an increase of $0.01 over the previous level. It appears that Duke Energy has regularly increased its quarterly dividend since 2005, accounting for spinning off its natural gas transmission and storage business into Spectra Energy in 2007. The stock currently yields 6.60%.
American Capital Agency Corp. (AGNC), which invests in agency securities for which the principal and interest payments are guaranteed by a U.S. Government agency, increased its quarterly dividend to $1.50 per share, up from the previous distribution of $0.85/share. The stock currently yields 25.40%.
Prospect Capital Corporation (PSEC), which is a closed-end investment company that lends to and invests in private and microcap public businesses, increased its quarterly dividend to 40.625 cents per share. This dividend marks Prospect Capital's 19th consecutive quarterly increase. The company’s investment objective is to generate both current income and long-term capital appreciation through debt and equity investments. The stock currently yields 16.90%.
PetSmart, Inc. (PETM), which provides products, services, and solutions for pets in North America., increased its quarterly dividend by a staggering 233% to 10 cents per share. The company’s Board of Directors also authorized a $350 million stock purchase plan that expires in January 2012. PetSmart, Inc. initiated a dividend payment policy in 2003 at 2 cents/share. The company has increased its dividend only once , in 2004 to 3 cents/share and kept it unchanged since, until the most recent increase. The stock currently yields 1.90%.
Darden Restaurants Inc. (DRI), which engages in the ownership and operation of full-service restaurants in the United States and Canada, increased its quarterly dividend by 25% to 25 cents per share. Darden Restaurants Inc has consistently increased its quarterly since 2005. The stock currently yields 3.10%.
As usual there’s not free lunch on Wall Street. Thus, before getting too excited about the high yielding dividend raisers from last week, research them carefully and make sure you understand how their business model works. In a market where cash is king, relying on the capital markets to fund growth could turn very expensive if done at the wrong moment.
Full Disclosure: None
Relevant Articles
- High yield stocks for current income
- Dividend Cuts - the worst nightmare for dividend investors
- Don’t chase High Yielding Stocks Blindly
- General Motors (GM) bankruptcy trade
- ACAS Dividend News
Friday, June 26, 2009
Coca Cola (KO) Dividend Stock Analysis
The Coca-Cola Company manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. It principally offers sparkling and still beverages. The company is member of the S&P 500, Dow Jones Industrials and the S&P Dividend Aristocrats indexes. Coca-Cola has paid uninterrupted dividends on its common stock since 1893 and increased payments to common shareholders every year for 47 years.
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.10% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.
The company has managed to deliver a 10.90% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $3.05-$3.10 for 2009 and $3.25-$3.30 by 2010. This would be a nice increase from the 2008 earnings per share of $2.49. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time.
Some analysts believe that Coca Cola could follow arch rival Pepsi Co’s moves to acquire its own bottlers in an effort to gain more control over the production and distribution of its beverages in key markets. Coke holds a 35% interest in its largest manufacturer and distributor of Coca Cola products, Coca-Cola Enterprises In. (CCE). Coca-Cola Enterprises Inc. accounts for about 40% of Coke’s concentrate sales and 16% of the company’s worldwide volume, which makes it a likely target of acquisition, should Coca Cola decide to follow Pepsi Co’s strategy of buying back its bottling operations.
The Return on Equity has been in a decline after hitting a high in 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 10.10% annually since 1999, which is slightly lower than the growth in EPS. The company last raised its dividend by 8% in February 2009, for the 47th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1969, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Coca Cola is trading at 20 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.5 and yields 3.40%. Check my analysis of Pepsi Co (PEP)
I believe that The Coca Cola Company is not as attractively valued at the moment as Pepsi Co. I would consider adding to my position there if it can cover its dividends at least two times by its earnings by the end of the year, and if the P/E ratio doesn’t increase above 20.
Full Disclosure: Long KO and PEP
From the end of 1998 up until December 2008 this dividend growth stock has delivered a negative annual average total return of 2.10% to its shareholders. The stock has largely traded between $65 and $40 over the past decade.
The company has managed to deliver a 10.90% average annual increase in its EPS between 1999 and 2008. Analysts are expecting an increase in EPS to $3.05-$3.10 for 2009 and $3.25-$3.30 by 2010. This would be a nice increase from the 2008 earnings per share of $2.49. Future drivers for earnings could be the company’s tea, coffee and water operations. Cost savings initiatives could also add to the bottom line over time.
Some analysts believe that Coca Cola could follow arch rival Pepsi Co’s moves to acquire its own bottlers in an effort to gain more control over the production and distribution of its beverages in key markets. Coke holds a 35% interest in its largest manufacturer and distributor of Coca Cola products, Coca-Cola Enterprises In. (CCE). Coca-Cola Enterprises Inc. accounts for about 40% of Coke’s concentrate sales and 16% of the company’s worldwide volume, which makes it a likely target of acquisition, should Coca Cola decide to follow Pepsi Co’s strategy of buying back its bottling operations.
The Return on Equity has been in a decline after hitting a high in 2001. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Annual dividends have increased by an average of 10.10% annually since 1999, which is slightly lower than the growth in EPS. The company last raised its dividend by 8% in February 2009, for the 47th year in a row.
A 10 % growth in dividends translates into the dividend payment doubling every seven years. If we look at historical data, going as far back as 1969, The Coca Cola Company has indeed managed to double its dividend payment every seven years on average.
The dividend payout ratio remained above 50% for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently Coca Cola is trading at 20 times earnings and yields 3.30%. In comparison arch rival in the cola wars Pepsi Co (PEP) trades at a P/E multiple of 16.5 and yields 3.40%. Check my analysis of Pepsi Co (PEP)
I believe that The Coca Cola Company is not as attractively valued at the moment as Pepsi Co. I would consider adding to my position there if it can cover its dividends at least two times by its earnings by the end of the year, and if the P/E ratio doesn’t increase above 20.
Full Disclosure: Long KO and PEP
Wednesday, June 24, 2009
Largest Stock Buybacks for first quarter of 2009
In a previous article I outlined the reasons why I consider stock buybacks to be inferior to dividends. Nevertheless it pays to know which the largest repurchasers of their common stocks are. I am also a supporter of companies doing both stock buybacks while regularly raising dividends.
The 20 largest stock buybacks from the 1Q 2009 are listed below: (source S&P)
The decrease in buybacks was about 73% in comparison to the first quarter of 2008. S&P 500 companies spent $30.8 billion buying back their own stock in 1Q 2009 versus $113.9 billion in 1Q 2008.
It’s interesting to note that several prominent dividend stocks appear on the list.
Exxon Mobil (XOM) accounted for the majority of buybacks in the first quarter, after purchasing $7.85 billion worth of its own stock. This was slightly down from the $8.845 billion spent on buybacks in 4Q 2008. In comparison the largest oil and gas company in the US paid only $1.98 billion in dividend payments for the quarter. Exxon Mobil has been consistently increasing its dividends for 27 consecutive years, with its most recent dividend payment being 42 cents/share. Check my analysis of Exxon Mobil (XOM).
International Business Machines (IBM) was the third largest company repurchasing its shares, after spending $1.765 billion in the first quarter 2009 and $47.945 billion since 2004. This was higher from the $0.74 billion spent on buybacks in 4Q 2008.In comparison “Big Blue”, as traders on the NYSE call this global tech behemoth, spent only $675 million on dividends in the same quarter. IBM has been consistently increasing its dividends for 14 consecutive years, with its most recent dividend payment being $0.55/share . Check my analysis of IBM.
Procter & Gamble (PG) spent $1.122 billion on buybacks versus $1.215 billion on dividends. In comparison the company spent $1.332 billion on share buybacks and $1.239 billion on dividend payments. The money spent on buybacks translates into 38 to 44 cents/share for each of the past two quarters. This provider of branded consumer goods products worldwide has spent over $43 billion on share buybacks between 4Q 2004 and 1Q 2009, which was much larger than the amount of total dividends paid for the same period. Procter & Gamble is a dividend aristocrat, which has been increasing its dividends for the past 53 consecutive years, with its most recent dividend payment being 44 cents/share . Check my analysis of Procter & Gamble (PG).
Another notable company on the share repurchasing front is Johnson & Johnson (JNJ). The company repurchased $834 million worth of stock in 1Q 2009 versus $878 million bought in 4Q 2008. The money spent on buybacks translates into 30 cents/share for each of the past two quarters. In comparison this healthcare company spent $1.273 billion on dividends for each of the last two quarters. JNJ has been consistently increasing its dividends for 47 consecutive years, with its most recent dividend payment being 49 cents/share. Check my analysis of Johnson and Johnson (JNJ).
McDonald’s (MCD) returned $813 million and $553.4 million respectively on stock buybacks and dividend distributions in the latest quarter. The stock buyback translates into $0.70/share for the quarter, which could have been paid as a cash dividend. McDonald’s has been consistently increasing its dividends for 32 consecutive years, with its most recent dividend payment being 50 cents/share. Check my analysis of McDonald’s (MCD).
Wal-Mart Stores (WMT) returned $886 million and $1.067 billion on share repurchases and dividends for the latest quarter. The money spent on buybacks translates into 22.50 cents/share for the latest quarter. In comparison, the world’s largest retailer returned $932 million in the form of dividends and zero in the form of stock buybacks in the previous quarter. Most recently it announced a new share repurchase program that gives the company authorization to repurchase $15 billion of its shares. Wal-Mart (WMT) has increased its quarterly dividend in each of the past thirty-five years, with its most recent dividend payment being 27.3 cents/share. Check my analysis of WMT.
Overall, the money spent on stock buybacks, does increase earnings per share in the long run, which also leaves room for faster dividend growth. This could also lower total dividend costs paid by corporations down the road.
In the end I enjoy a balanced approach, where companies do both dividends and share buybacks. My preference is on dividends, as I view share buybacks as a way to share the wealth with shareholders only during good times. The recent Standard and Poors report shows the steep declines in share repurchases in the first quarter of 2009. This confirms my theory that stock buybacks are similar to special dividends, and should not be taken into consideration when evaluating the income attractiveness of dividend stocks. However while both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.
Relevant Articles:
- Dividends versus Share Buybacks/Stock repurchases
- Dividends and Stock Buybacks in the news
- Exxon Mobil (XOM) Dividend Stock Analysis
- IBM Dividend Stock Analysis
The 20 largest stock buybacks from the 1Q 2009 are listed below: (source S&P)
The decrease in buybacks was about 73% in comparison to the first quarter of 2008. S&P 500 companies spent $30.8 billion buying back their own stock in 1Q 2009 versus $113.9 billion in 1Q 2008.
It’s interesting to note that several prominent dividend stocks appear on the list.
Exxon Mobil (XOM) accounted for the majority of buybacks in the first quarter, after purchasing $7.85 billion worth of its own stock. This was slightly down from the $8.845 billion spent on buybacks in 4Q 2008. In comparison the largest oil and gas company in the US paid only $1.98 billion in dividend payments for the quarter. Exxon Mobil has been consistently increasing its dividends for 27 consecutive years, with its most recent dividend payment being 42 cents/share. Check my analysis of Exxon Mobil (XOM).
International Business Machines (IBM) was the third largest company repurchasing its shares, after spending $1.765 billion in the first quarter 2009 and $47.945 billion since 2004. This was higher from the $0.74 billion spent on buybacks in 4Q 2008.In comparison “Big Blue”, as traders on the NYSE call this global tech behemoth, spent only $675 million on dividends in the same quarter. IBM has been consistently increasing its dividends for 14 consecutive years, with its most recent dividend payment being $0.55/share . Check my analysis of IBM.
Procter & Gamble (PG) spent $1.122 billion on buybacks versus $1.215 billion on dividends. In comparison the company spent $1.332 billion on share buybacks and $1.239 billion on dividend payments. The money spent on buybacks translates into 38 to 44 cents/share for each of the past two quarters. This provider of branded consumer goods products worldwide has spent over $43 billion on share buybacks between 4Q 2004 and 1Q 2009, which was much larger than the amount of total dividends paid for the same period. Procter & Gamble is a dividend aristocrat, which has been increasing its dividends for the past 53 consecutive years, with its most recent dividend payment being 44 cents/share . Check my analysis of Procter & Gamble (PG).
Another notable company on the share repurchasing front is Johnson & Johnson (JNJ). The company repurchased $834 million worth of stock in 1Q 2009 versus $878 million bought in 4Q 2008. The money spent on buybacks translates into 30 cents/share for each of the past two quarters. In comparison this healthcare company spent $1.273 billion on dividends for each of the last two quarters. JNJ has been consistently increasing its dividends for 47 consecutive years, with its most recent dividend payment being 49 cents/share. Check my analysis of Johnson and Johnson (JNJ).
McDonald’s (MCD) returned $813 million and $553.4 million respectively on stock buybacks and dividend distributions in the latest quarter. The stock buyback translates into $0.70/share for the quarter, which could have been paid as a cash dividend. McDonald’s has been consistently increasing its dividends for 32 consecutive years, with its most recent dividend payment being 50 cents/share. Check my analysis of McDonald’s (MCD).
Wal-Mart Stores (WMT) returned $886 million and $1.067 billion on share repurchases and dividends for the latest quarter. The money spent on buybacks translates into 22.50 cents/share for the latest quarter. In comparison, the world’s largest retailer returned $932 million in the form of dividends and zero in the form of stock buybacks in the previous quarter. Most recently it announced a new share repurchase program that gives the company authorization to repurchase $15 billion of its shares. Wal-Mart (WMT) has increased its quarterly dividend in each of the past thirty-five years, with its most recent dividend payment being 27.3 cents/share. Check my analysis of WMT.
Overall, the money spent on stock buybacks, does increase earnings per share in the long run, which also leaves room for faster dividend growth. This could also lower total dividend costs paid by corporations down the road.
In the end I enjoy a balanced approach, where companies do both dividends and share buybacks. My preference is on dividends, as I view share buybacks as a way to share the wealth with shareholders only during good times. The recent Standard and Poors report shows the steep declines in share repurchases in the first quarter of 2009. This confirms my theory that stock buybacks are similar to special dividends, and should not be taken into consideration when evaluating the income attractiveness of dividend stocks. However while both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.
Relevant Articles:
- Dividends versus Share Buybacks/Stock repurchases
- Dividends and Stock Buybacks in the news
- Exxon Mobil (XOM) Dividend Stock Analysis
- IBM Dividend Stock Analysis
Tuesday, June 23, 2009
Dividends versus Share Buybacks/Stock repurchases
Companies have several means through which they share their prosperity with shareholders. Dividends are the portion of corporate profits paid out to stockholders in the form of cash. Share buybacks on the other hand represent cash distributed to existing shareholders in exchange for a fraction of the company’s outstanding equity. While both methods have their pros and cons, when used carefully, they could strongly add to the total returns of long-term shareholders.
Share Repurchases have gained popularity among companies because there's a total flexibility with them, whereas dividend payments require a commitment. With repurchases a company could spend billions buying back its stock in one year, and then spend nothing for the next few years. With dividends however a company that cuts, eliminates or suspends its payment would likely enrage shareholders.
Some investors believe that stock buybacks are the most tax efficient way for companies to return cash to shareholders. Currently, the highest tax on qualified dividend income is 15% for the top income tax bracket. When companies earn money, they pay taxes on it. When companies pay dividends, dividends are taxed again at the individual level.
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.
One reason for the increased popularity of buybacks is that companies do not wish to commit to a certain dividend level, since their earnings are volatile. Stocks like Exxon Mobil (XOM) didn’t pay a large dividend during the huge run up in oil prices over the past decade, partly because their executives might have believed that once oil prices stabilized, dividends would have had to been cut in order to account for the new reality. It looks like Exxon Mobil (XOM) managers were correct about using caution in expecting the good times to continue indefinitely. Projections for near term earnings per share are to contract by 50% in 2009 before recovering to only two-thirds of the record earnings numbers from 2008. Check my analysis of Exxon Mobil (XOM)
Some analysts believe that companies use share buybacks as a clever way to offset shareholder dilution from exercised stock options from management. With stock repurchases companies fail to reduce share count due to new issuance of stock to redeem employee stock options. Stock buybacks are typically initiated in good times, when stock prices are high and discontinued in bad times, when stock prices are low, Thus, corporations end up purchasing their own stock at inflated prices, which greatly limits the supposed benefits of increasing the ownership percentage of each share owned by stockholders.
General Electric (GE) is a prime example for this. In 2007 the company spend $12.319 billion buying back stock, which reduced the share count from 10394 million to 10218 million, or a decrease of 176 million shares. This comes out to $70/share, whereas the high and low prices of GE stock in 2007 were $42.15 and $34.50 respectively. This sure tells us that the company gave out at least one hundred million shares through option exercises. Facing a liquidity crunch in 2008 the company was forced to sell $12 billion worth of stock at $22.25/share, much lower than the price is had paid for buybacks over the past 4 years. Back in February 2009, the company cut its dividend as well in order to conserve cash.
IBM is another interesting buyback stock to research further. Over the past decade, the worldwide supplier of advanced information processing technology and communication systems and services and program products has managed to decrease the number of shares outstanding from 1.852 billion at the end of 1998 to 1.339 billion by 2008. At the same time revenues have increased by 18.4% from $87.548 billion to $103.63 billion over the past decade. Earnings per share increased by 116.75% from $4.12 to $8.93, mainly due to share buybacks, since net income only rose by 60.4% from $7.692 billion to $12.334 billion in the process. $100 invested in IBM stock at the end of 1998 would now be worth $130.30 with dividends reinvested, and only $117.4 without reinvestment. Dividend payments increased from 0.11/share in 1998, when the yield was a little less than 0.5% to $0.55/share, for a yield of less than 2.1%.
The company has spent $73 billion on share buybacks, which should have been paid out as special dividends instead. This would have increased the total returns for shareholders by rewarding them with a higher dividend payment, the compounding effects of which could have greatly magnified long-term stockholder returns. I am a supporter of the extra cash being paid out as a dividend, since its contribution to the total returns would have been more visible than share buybacks. Check my analysis of International Business Machines (IBM).
Dividends on the other hand are mostly cash in hand that gives the investors options about their further allocation. They could be spent, re-invested in the same or other stocks or could be placed in a savings account. Dividends are somewhat more predictable and reliable sources of income, especially if you are looking for an alternative income stream in retirement.
Dividends have contributed a large portion of total returns to shareholders. They typically account for 40% of average annual total returns each year and are the only form of returns on investment that shareholders achieve during bear markets. The reinvestment of dividends has accounted for majority of S&P 500 total returns as well over the past century.
Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.
It would be much easier for an individual who plans on living off their investments to rely solely on dividends that on hoping that share buybacks would lift the value of his or her stocks. Selling your stocks at the midst of a bear market in order to sustain your lifestyle doesn’t make much sense, yet investors keep cheering the supposed “tax efficiency” of stock buybacks.
I typically treat share repurchases the same way as special dividends. Share buybacks are inferior to dividend payments, as they could be canceled or temporary suspended at any moment, without many investors noticing this. Dividend payments on the other hand are visible to shareholders and cutting or eliminating a payment would certainly create negative publicity for the company. I would much rather see special dividends, rather than stock buybacks, which are a clever way to mask the diluting effect of employee option being exercised.
Full Disclosure: None
Relevant Articles:
- Special Dividends Unlock Hidden Value in Stocks
- Dividends and Stock Buybacks in the news
- Dividend Investing vs Trading
- IBM Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
Share Repurchases have gained popularity among companies because there's a total flexibility with them, whereas dividend payments require a commitment. With repurchases a company could spend billions buying back its stock in one year, and then spend nothing for the next few years. With dividends however a company that cuts, eliminates or suspends its payment would likely enrage shareholders.
Some investors believe that stock buybacks are the most tax efficient way for companies to return cash to shareholders. Currently, the highest tax on qualified dividend income is 15% for the top income tax bracket. When companies earn money, they pay taxes on it. When companies pay dividends, dividends are taxed again at the individual level.
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.
One reason for the increased popularity of buybacks is that companies do not wish to commit to a certain dividend level, since their earnings are volatile. Stocks like Exxon Mobil (XOM) didn’t pay a large dividend during the huge run up in oil prices over the past decade, partly because their executives might have believed that once oil prices stabilized, dividends would have had to been cut in order to account for the new reality. It looks like Exxon Mobil (XOM) managers were correct about using caution in expecting the good times to continue indefinitely. Projections for near term earnings per share are to contract by 50% in 2009 before recovering to only two-thirds of the record earnings numbers from 2008. Check my analysis of Exxon Mobil (XOM)
Some analysts believe that companies use share buybacks as a clever way to offset shareholder dilution from exercised stock options from management. With stock repurchases companies fail to reduce share count due to new issuance of stock to redeem employee stock options. Stock buybacks are typically initiated in good times, when stock prices are high and discontinued in bad times, when stock prices are low, Thus, corporations end up purchasing their own stock at inflated prices, which greatly limits the supposed benefits of increasing the ownership percentage of each share owned by stockholders.
General Electric (GE) is a prime example for this. In 2007 the company spend $12.319 billion buying back stock, which reduced the share count from 10394 million to 10218 million, or a decrease of 176 million shares. This comes out to $70/share, whereas the high and low prices of GE stock in 2007 were $42.15 and $34.50 respectively. This sure tells us that the company gave out at least one hundred million shares through option exercises. Facing a liquidity crunch in 2008 the company was forced to sell $12 billion worth of stock at $22.25/share, much lower than the price is had paid for buybacks over the past 4 years. Back in February 2009, the company cut its dividend as well in order to conserve cash.
IBM is another interesting buyback stock to research further. Over the past decade, the worldwide supplier of advanced information processing technology and communication systems and services and program products has managed to decrease the number of shares outstanding from 1.852 billion at the end of 1998 to 1.339 billion by 2008. At the same time revenues have increased by 18.4% from $87.548 billion to $103.63 billion over the past decade. Earnings per share increased by 116.75% from $4.12 to $8.93, mainly due to share buybacks, since net income only rose by 60.4% from $7.692 billion to $12.334 billion in the process. $100 invested in IBM stock at the end of 1998 would now be worth $130.30 with dividends reinvested, and only $117.4 without reinvestment. Dividend payments increased from 0.11/share in 1998, when the yield was a little less than 0.5% to $0.55/share, for a yield of less than 2.1%.
The company has spent $73 billion on share buybacks, which should have been paid out as special dividends instead. This would have increased the total returns for shareholders by rewarding them with a higher dividend payment, the compounding effects of which could have greatly magnified long-term stockholder returns. I am a supporter of the extra cash being paid out as a dividend, since its contribution to the total returns would have been more visible than share buybacks. Check my analysis of International Business Machines (IBM).
Dividends on the other hand are mostly cash in hand that gives the investors options about their further allocation. They could be spent, re-invested in the same or other stocks or could be placed in a savings account. Dividends are somewhat more predictable and reliable sources of income, especially if you are looking for an alternative income stream in retirement.
Dividends have contributed a large portion of total returns to shareholders. They typically account for 40% of average annual total returns each year and are the only form of returns on investment that shareholders achieve during bear markets. The reinvestment of dividends has accounted for majority of S&P 500 total returns as well over the past century.
Companies that regularly pay dividends impose a discipline on managers to treat cash very carefully and thus make better decisions by adopting projects, which would generally improve the bottom line, without sacrificing return on equity.
It would be much easier for an individual who plans on living off their investments to rely solely on dividends that on hoping that share buybacks would lift the value of his or her stocks. Selling your stocks at the midst of a bear market in order to sustain your lifestyle doesn’t make much sense, yet investors keep cheering the supposed “tax efficiency” of stock buybacks.
I typically treat share repurchases the same way as special dividends. Share buybacks are inferior to dividend payments, as they could be canceled or temporary suspended at any moment, without many investors noticing this. Dividend payments on the other hand are visible to shareholders and cutting or eliminating a payment would certainly create negative publicity for the company. I would much rather see special dividends, rather than stock buybacks, which are a clever way to mask the diluting effect of employee option being exercised.
Full Disclosure: None
Relevant Articles:
- Special Dividends Unlock Hidden Value in Stocks
- Dividends and Stock Buybacks in the news
- Dividend Investing vs Trading
- IBM Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
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