The Argument For Dividends Over Buybacks

The past decade companies and investors have witnessed a renaissance in the policy of corporations preferring stock repurchase agreements over cash dividend distributions to shareholders. While share repurchases can often be beneficial for shareholders, they also have many significant drawbacks:

• The shareholder has no control over at which price shares are to be repurchased. This responsibility rests with board of directors and may not be instituted at optimal prices. Since 2000, stock valuations have been historically high, as have share repurchase agreements. This actually destroys value for shareholders, since capital has been deployed less efficiently than it could have been.

• Repurchasing shares acts to boost EPS for shareholders and in effect share prices market willing. However, as noted above, repurchases are often made en mass during height of cyclical bull markets. When downturns occur, the repurchases have been essentially a waste for shareholders who own the shares with a long term mentality. Again, value has been lost for the shareholder.

Dividends on the other hand, transfer tangible value to the shareholder directly, who may then direct capital at their discretion, which may or may not be reinvestment into the shares of the dividend issuing company. There has been no value lost from the distribution of the dividend. Furthermore, a sound dividend policy has an effect on the stock price as well as future dividend expectations. Dividends represent a guaranteed return to shareholders, assuming stability in earnings and dividend policy.

I will note that share repurchases can be beneficial to the shareholder. That is if it is repurchased at attractive prices, when no other efficient deployment of capital is available to the firm at that moment in time, and dividends are already regularly distributed.