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.
Um … buybacks LITERALLY also return those profits to owners/shareholders! The main difference between dividends and buybacks is that for dividends, THE COMPANY decides who gets the profits and when they get it, for a buyback, THE SHAREHOLDERS decide when the profits are distributed to them.
In general, I prefer making those decisions for myself as a shareholder. I was somewhat distressed when my largest holding suddenly decided to institute a dividend (instead of only buybacks) a few years ago. It wreaks havoc for my tax planning, and if it continues (and it is likely to do so) it will cause me all sorts of tax timing headaches when I retire in a few years.
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.
The stock is VERY unlikely to be worth $1 billion in the future! History has shown that it will probably be worth substantially more. That’s why so many people reinvest their dividends regularly … because they know that fast. The sad thing is that most of the time they can only reinvest 60-70% of those dividends since part of it was collected in taxes.
In this case, that old adage is completely and utterly wrong. In this case, a bird in the hand is worth 0.7 of a bird in the bush.
So Warren Buffett’s Berkshire has been a poor investment choice over the last couple of decades?
Berkshire-Hathaway is an outlier. Most businesses exist as businesses, by that I mean they exist to make and sell products and or services. Not so Berkshire-Hathaway which is an investment fund disguised as a conglomerate to avoid the regulations that lay heavily on the investment sector to, supposedly, protect investors.
If you question the above, explain away the fact that Berkshire-Hathaway’s main business is investing in stocks. Isn’t that what mutual funds do? Berkshire-Hathaway also has a private equity sector where they buy whole closely held and private businesses which Buffett does NOT manage. All Buffett does is to take their excess working capital to invest in even more stocks and private businesses.
For Warren Buffett to give away cash that he could use to invest would be sacrilege! Notice that Warren Buffett uses Book Value as a key metric. Paying dividends lowers Book Value, Buffett would be shooting himself in the foot.
How about stock buybacks? Warren Buffett is not against them as long as the shares are below ‘fair value.’ In other words, he treats BRK-A & BRK-B like he would any other stock!
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
You could make the exact same argument for dividends as well. The JCs are the biggest shareholders, so they get the most benefit from dividends. They could forgo the dividend and do items 1)-5), but they decided to pay themselves the money instead.
But there are some good reasons why the proletariat benefits from buybacks instead of dividends. For example, if you are in accumulation phase (all things being equal) buybacks are better because you aren’t subtracting taxes along the way, so your final portfolio value will be higher. Now, your cost basis will be lower, but you also avoid an accounting headache. Clear win for buybacks in this scenario.
In early retirement, it is important to carefully management income in order to efficiently make Roth conversions and qualify for ACA subsidies. All things being equal, clear win for buybacks in this scenario too. And that even continues into full retirement age in preparation for managing RMDs.
I want to be 100% clear, I’m not saying dividends are bad. I’m saying that buybacks provide tangible, measurable benefits to the retail investor.
But since we’re on the topic, a common dividend strategy is to buy stocks that have a history of increasing dividends over a long period of time–the Dividend Aristocrats. But the Dividend Aristocrats pay only slightly more dividends than the broader market itself. And in when some of the DA’s suddenly cut their dividends, so the history wasn’t enough to maintain income. So do the Dividend Aristocrats actually provide any protection or is it an illusion?
Thanks, with the utterly normal horrifying news of the day it was most helpful.
I absolutely cannot understand the senseless shootings, specially in schools. What is it that brings out the barbaric nature of humans? Guns are the tools but there must exist an underlying malady. What is it? I have this crazy idea that it relates to too much safety, not enough risk in our lives so we have to add more like jumping out of airplanes without a parachute or jumping off bridges with a bungee cord, or the crazy stunts they to with skateboards and other high risk sports.
<<For Warren Buffett to give away cash that he could use to invest would be sacrilege! >>
Not at all. He’s bought back BRK shares when he can’t find any worthy investments, the drag of the cash pile gets too high, and the book value falls below his threshold metric.
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.
So do the Dividend Aristocrats actually provide any protection or is it an illusion?
Really good question. Chatting with a corporate banker on the subject … of stock buybacks and often she got short notice calls from large corporate clients for large sums of cash for short periods of time. They were often willing to pay higher interest due to the short notice and short term hold. Of course the timing often matched with stock buybacks that increased share price and executive bonuses that are affected by share price.
While I love high dividend payers I also consider pricing power. A perfect example is Putin’s stupid war that has added pricing power to companies resident in countries that produce energy (perhaps food and fertilizer?) that is surplus to domestic needs.
The United States remained a net crude oil importer in 2021, importing about 6.11 million b/d of crude oil and exporting about 2.90 million b/d.Apr 21, 2022
Meanwhile United States Exports more gas (as mostly LNG) than it imports.