Give me the cash!

Investment Analysis Clubs Macro Economic Trends and Risks
1

I would no more buy a company which doesn’t pay a dividend than I would work for a company that didn’t pay a salary but promised a lump sum when I quit. I think that companies with extra cash flow should re-invest it productively in R&D, equipment, etc. or else distribute it to shareholders. Buying back stock to increase the share price is bogus, in my opinion, since it adds no value to the enterprise.

I sold my S&P 500 index funds (overweight in overpriced giants) months ago and replaced them with dividend-paying funds such as Vanguard Equity-income fund. Even though both funds are falling in the general carnage, the dividend-paying fund is doing better than the S&P 500 fund.

https://stockcharts.com/freecharts/candleglance.html?FXAIX,V…

Investors are shifting to this concept in droves.

https://www.wsj.com/articles/there-is-a-rush-for-cash-on-wal…

**There Is a Rush for Cash on Wall Street**
**One piece of evidence is the market’s embrace of dividend-paying companies over firms that do buybacks**
**By Karen Langley and Gunjan Banerji, The Wall Street Journal, May 24, 2022**

**Cash is king right now. The latest evidence: the market’s embrace of dividend-paying stocks over another longtime favorite, firms that do buybacks....**

**Since the start of 2020, companies that pay high levels of dividends have continued outperforming those with lower payouts, while shares of companies putting the most money into stock repurchases have lagged behind those with the lowest buybacks...High inflation and rising interest rates eat away at the value of companies’ future earnings while increasing the attractiveness of cash today. ...**

**The S&P 500 High Dividend index is up 2.8% in 2022, while the S&P 500 Buyback index has declined 12%....** [end quote]

When money is cheap because the Federal Reserve is forcing negative real interest rates, speculators load up on companies that promise future, not present rewards. The NPV equation that shows the present value of (forecast) future earnings gives an exponentially lower Net Present Value as interest rates rise.

To me, a share of stock is a share in a company. I want value for my investment which is based on current and future expected earnings, backed up by dividends. It’s not a speculation on wild growth of stock prices.

Wendy

6 Likes
2

I hope you/we are right. Veirx is my second largest holding after vig (vanguard dividend appreciation). Both lagged behind vfiax and vti throughout the bull run from 2009-2021, but are holding up (relatively) well this year. On the other hand my smaller growth etf vug is getting crushed.

I have a much larger Vig holding than veirx because veirx’s end of the year long term capital gains declarations kept messing up my taxes.

3

I want value for my investment which is based on current and future expected earnings, backed up by dividends. It’s not a speculation on wild growth of stock prices.

It’s a binary choice? Either dividends or “speculation on wild growth of stock prices”?

7 Likes
4

It’s a binary choice?

Yep, it is. Black and white world we have here. Either this or that, cannot be both.

For some.

Pete

5

I just sold half my QQQ (down to 12% of assets) because I’ve nearly given up on a tech rebound. Sitting on 24% cash. Likely purchases will be more VTV, more VYM, more FPI. And avoiding individual stocks for now. But I will probably wait a few days before deploying.

Down 34% from November. People keep saying this is not dot-com, is not real estate bubble. But it keeps feeling like it more and more as time goes on. It’s just happening slowly this time.

1 Like
6

I would no more buy a company which doesn’t pay a dividend than I would work for a company that didn’t pay a salary but promised a lump sum when I quit.

Buying back stock to increase the share price is bogus, in my opinion, since it adds no value to the enterprise.

How does paying a dividend add value to the enterprise?

The Captain

9 Likes
7

I think that companies with extra cash flow should re-invest it productively in R&D, equipment, etc. or else distribute it to shareholders. Buying back stock to increase the share price is bogus, in my opinion, since it adds no value to the enterprise.

Buy backs don’t add value to the enterprise, but they are an efficient way to return value to shareholders. For example, let’s say a company pays out $1 billion in dividends. Those monies are taxed before they can be spent by the shareholders.

But if the same company buys back $1 billion of stock, the remaining shares are now worth $1 billion more, tax free and the investor can decide for herself when and how much of the gain to realize.

8 Likes
8

<It’s a binary choice? Either dividends or “speculation on wild growth of stock prices”? >

Obviously not. I was making a point. Sheesh!

I allocate assets just like every other investor. It’s a matter of balance.
Wendy

3 Likes
9

<How does paying a dividend add value to the enterprise?>

Let me repeat: IF the company doesn’t invest profits in R&D, equipment purchases, etc. which DO add value to the enterprise, (at least part of) the profits should be returned to the OWNERS of the business (the shareholders) as dividends.

IF the company DOES have productive investments which will add value to the company, of course the managers should make those investments. But plenty of companies DON’T have such investments and buy back stock shares instead of returning the profits to the owners.

Wendy

5 Likes
10

<But if the same company buys back $1 billion of stock, the remaining shares are now worth $1 billion more, tax free and the investor can decide for herself when and how much of the gain to realize. >

That is assuming that those $1 billion shares of stock will still be worth $1 billion when the investor wants to sell them. The dividend is cash in hand now. A bird in the hand is worth 2 in the bush.

https://www.google.com/search?client=firefox-b-1-d&q=net…

Wendy

4 Likes
11

< I will probably wait a few days before deploying.>

It’s way too soon. The knife is still falling.

Follow the “mungofitch 99-day rule.” Wait until the market is making new highs for 99 trading days. Otherwise, you could buy into a still-falling market.

This could take a while.

The nasty 1973-4 recession and market drop recovered briefly, but it was a head-fake. It was followed by an equally nasty 1975 market drop.

https://en.wikipedia.org/wiki/1973%E2%80%931974_stock_market…
https://www.macrotrends.net/2324/sp-500-historical-chart-dat…

Be patient. Don’t let the cash burn a hole in your pocket. If history is any guide, the market won’t recover until the Fed stops raising rates. Nobody knows yet (even the Fed) when that will be.

Wendy

1 Like
12

Let me repeat: IF the company doesn’t invest profits in R&D, equipment purchases, etc. which DO add value to the enterprise, (at least part of) the profits should be returned to the OWNERS of the business (the shareholders) as dividends.

Like syke6 said, buybacks are a more efficient way of returning capital to shareholders.

Buying back shares returns capital to the market. Some shareholders decide to sell, others decide not to sell. What’s so bad about letting shareholder decide if they want to take the cash or to let the stock price increase?

IF the company DOES have productive investments which will add value to the company, of course the managers should make those investments. But plenty of companies DON’T have such investments and buy back stock shares instead of returning the profits to the owners.

Just because “plenty of companies DON’T have such investments and buy back stock shares” does not make buying back shares a bad thing." There are plenty of people in jail, does that make us all criminals?

The Captain

3 Likes
13

Like syke6 said, buybacks are a more efficient way of returning capital to shareholders.

If the CEO’s bonus is keyed to the price of the stock, then buying back stock is the most efficient way of increasing the CEO’s bonus. Shareholders may ride along, but, need to get out of the way before the gutted out company collapses.

Going back to the example I am most familiar with; how did Boeing get to Billions in negative equity? By spending all their profit buying back stock.

Welchism got Boeing stock up to $440 in Feb 19. Fell to $330 in Feb 20. Rebounded to $269 in March 21, after the plague crash. Now, it sits at $118.

Welchism got GE up to $450 in 2000, adjusted for reverse split. $246 in July 2016. $102 in Feb 20. $74 today.

Where is the “shareholder value” in Welchism?

Steve

2 Likes
14

Buying back shares returns capital to the market. Some shareholders decide to sell, others decide not to sell. What’s so bad about letting shareholder decide if they want to take the cash or to let the stock price increase?

It used to be that share buybacks were considered stock manipulation by the company. I tend to agree with Wendy. I don’t like seeing buybacks. It is just an artificial boost to stock price. There must be better things to do with excess corporate cash than inflating the wealth of the JC’s w/o taxation.

  1. R&D
  2. Expansion
  3. Debt reduction
  4. Pay raises and/or bonuses/profit sharing for the employees
  5. Lower costs to their customers
2 Likes
15

Thank you for recommending this post to our Best of feature.

…

Obviously not. I was making a point. Sheesh!

I allocate assets just like every other investor. It’s a matter of balance.
Wendy

Not me. Every one of my 11 positions is Canadian (tax free accounts), pays a dividend (starts out minimum 4%) and I generally reinvest the dividend cash into existing or if enough has gather possibly a new position.

So far I’ve done very well (impressed the corporate banker daughter) but mostly I’m in pipelines (cash machines), Canadian Banks, a couple of producers, two power companies and a telecom company that I hate but love their (5.45%) dividend.

The Tax Free accounts (TFSA) require Canadian listing, not a problem and it sure saves a lot of paperwork at tax time.

Of course I really don’t need the money to be retired on as our government pensions and zero debt policy cover us very nicely.

This also helps.

https://economicdashboard.alberta.ca/oilprice

Tim

16

captainccs asks,

<<I would no more buy a company which doesn’t pay a dividend than I would work for a company that didn’t pay a salary but promised a lump sum when I quit.>>

Buying back stock to increase the share price is bogus, in my opinion, since it adds no value to the enterprise.

How does paying a dividend add value to the enterprise?

A dividend adds value if enough retail shareholders believe it does. It depends on what you can sell the investing public. Just like Medicare Advantage or a high-fee annuity, it’s all about effective marketing.

5-yr returns VEIPX vs. BRKA

https://finance.yahoo.com/chart/VEIPX/#eyJpbnRlcnZhbCI6IndlZ…

I’d post 10 and 20 year returns, but it just gets embarrassing.

A stock buyback is preferable to a dividend if the company has no other use for the cash since it’s not a taxable event to the shareholder. Those that want “dividend income” can then sell a small number of shares to capture the value of the stock buyback. Long-term investors can hold their position without the tax hit.

If you can minimize the skim of fee and taxes, the wealth just flows.

intercst

1 Like
17

I tend to agree with Wendy. I don’t like seeing buybacks.

Everyone is free to like or dislike stock buybacks. What I object to is the demonizing of a perfectly legitimate transaction.

Funny thing, people hate secondary offerings because they dilute their shares. Buybacks are the opposite of secondaries and people also hate then. Come or go you are hated! The only sensible thing is to do is do NOTHING!!!

The Captain

8 Likes
18

IF the company doesn’t invest profits in R&D, equipment purchases, etc. which DO add value to the enterprise, (at least part of) the profits should be returned to the OWNERS of the business (the shareholders) as dividends.

So Warren Buffett’s Berkshire has been a poor investment choice over the last couple of decades?

He specifically doesn’t issue dividends so that the stock owner can choose to sell a few shares, if they want some cash, but it doesn’t trigger a taxable event unless you want it to.

Mike

4 Likes
19

The captain;

Come or go you are hated! The only sensible thing is to do is do NOTHING!!!

LOL. A classic denny good natured funny rant.

Thanks, with the utterly normal horrifying news of the day it was most helpful.

david fb

1 Like
20

Thank you for recommending this post to our Best of feature.

I would no more buy a company which doesn’t pay a dividend than I would work for a company that didn’t pay a salary but promised a lump sum when I quit.

You and me both, sister!

Desert (CVX, XOM, T, BNS, BKH, ED, ATGFF, NI, NWN, TRP, ENB, WRE, WGL, XEL, DUK, SO & KO) Dave