[sh1mmer]

Is it just me that thinks it's insane that companies can permanently plan to not pay (or pay small) dividends?

If market trading is solely based on the ability to resell stock at a higher price how is the market expected to select companies that deliver real value to the economy?

Surely the ability of a company to consistently and stably deliver dividends to the stock holders would be the best measure of success, re-investment cases aside.

Unless I misunderstand the only shareholder value in this context is the ability to flip the stock or get a piece of the action if the company is sold.

[jakarta]

You don't need to pay dividends to increase shareholder value. It just depends on how good management is with allocating capital.

Buybacks can work just as well if you are buying back at the right price. A lot of management teams are bad at capital allocation and buyback stock at 52 week highs - that is almost always incredibly stupid.

But sometimes the business is trading at irrationally low levels and it makes a lot of sense to just buyback stock, especially if the fundamentals are in tact. I saw a company doing this and it is a great decision, their business earns a 50% return on invested capital and they have an earnings yield around 20%. It is a slam dunk strategy. When it is overvalued, you can issue stock and use it for acquisitions.

Look at Henry Singleton who ran Teledyne and used that strategy. Teledyne went from $100,000 in profits in 1960 to $238 million in 1986. Shareholders’ equity grew from $2.5 million to over $1.6 billion. Teledyne trounced the market by 4x over that period.

Using excess capital to fund accretive acquisitions, internal growth, or to invest outside of the company can work if you are disciplined in the process (most aren't). Warren Buffett became one of the richest people in the world, simply by doing this (it sure wasn't his $100K salary).

[eru]

> Buybacks can work just as well if you are buying back at the right price. A lot of management teams are bad at capital allocation and buyback stock at 52 week highs - that is almost always incredibly stupid.

The stock price for buybacks doesn't matter, if you only care about getting money back into investors' hands.

[jakarta]

Incorrect. If your stock is overvalued, a buyback is an inefficient and destructive method for getting money back into shareholders hands. You would be better off giving a special dividend instead.

[rphlx]

Debatable in the US, once the Bush dividend tax cuts expire next yr.

[eru]

Please explain.

[jakarta]

If you spend $100M buying back stock at the top of the market and then the next year, the bubble pops and your stock is down 50% was that really good capital allocation?

For every dollar you spent, you have effectively lost 50 cents. Sears admitted as much back in 2007 when they were buying back stock at $180 only to watch it drop to $90 a few months later. Remember, the idea with buybacks is to reduce overall share count so that you boost EPS and in turn your share price.

The amount you can retire might double if you simply wait out a bubble period. That's why dividends and buybacks need to be looked at relative to where the stock valuation is. When your stock is trading at a peak valuation, if you want to release value to shareholders, you are much better off using a dividend than a buyback.

[eru]

You can play the stock market, and you can put money back into investors pockets.

If you want managers to play the stock market, your comments are spot on--but you shouldn't restrict them to buying only shares of their own company. If they are good at predicting when valuations are high and going lower, or the other way round, you should open an investment fund and profit from their expertise.

Most companies aren't in the business of playing the stock market.

If you just want to transfer money from the company to the stock holders, you can either issue dividends or buy back shares at any time there's excess cash. Apart from taxation issues, there's no difference between share buy-backs and dividends in terms of getting money back to the investors.

[cschneid]

The theory is that Apple can spend the money better than the investor, by using it to do more R&D, make new products, and make the portion of the company represented by the share more valuable. In growth mode, that's not unusual.

In companies that can't do much R&D, you see much more dividend action, for example, natural resource stocks are high dividend, since there's near nothing they can do to reinvest, at least not with everything they pull in.