If you are reading this, it is because dividends are important to you in choosing your investments, either because they allow you to collect income, or because you are convinced that dividend companies (ideally increasing ones) are also those that promise long-term growth. All this is basically very simple (theoretically).
Here are some numbers to put things in perspective: Since the beginning of 2013, Exxon (the record holder) has repurchased about USD 220 billion (sic) of its own stock. In 2013, the S&P 500 companies cumulatively repurchased USD 500 billion of their own stock.
If we put these amounts in relation to the cash flow generated by their current operations, we arrive at figures that really make our heads spin: for Exxon, 45%; Cisco, 69%; P&G, 54%; Pfizer, 38%; Wal-Mart, 29%. We see that no sector of activity is spared.
So what should we make of all this? First of all, and to put it simply, a company has three options when it has excess cash: invest in the company (through staff for service companies or capex for industries); pay dividends or buy back its own shares. It seems that the balance between these three choices is somewhat broken when we read the astronomical figures cited above.
Of course, the small investor that I am has a certain interest in the company buying back its shares but not my shares: indeed, the demand will increase the price of my shares, can positively affect my dividends (all things being equal, the fewer shares in circulation, the higher the dividend per share will be). But fewer shares in circulation also means a higher volatility of these, which I appreciate less. But more fundamentally, what does this communicate about a company, and especially about its Management, when it no longer knows what to do with your cash and returns it to its shareholders? That it has no more ideas? That it is satisfied as it is and does not try anything anymore? That the markets are drying up? (Quick, sell!). This is a very strange and contradictory message that the shareholder receives and above all, it affects all the calculations (distribution ratio; increasing dividends; growth rate) usually used to evaluate the health of a company. It is therefore quite disruptive.
Of course, there are many tax reasons that can be given for these buybacks, as well as selfish reasons from management (it is often paid based on profit per share, so the less there is….). But all these reasons have nothing to do with the dynamism that a company should demonstrate in my opinion. It would therefore be good if Jérôme could include this criterion in his wonderful tables for an evaluation as objective as possible of dividend-growing stocks. The fewer buybacks there are, the more sustainable the dividends are and the less the price is affected by one-off parameters.
Sources: Bloomberg and The Economist, September 13, 2014 edition
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Thank you Armand for this great insight. But as you say, buybacks have good and bad sides. I don't necessarily find them disruptive as long as they contribute to a long-term vision of the company. Ultimately, we are in a situation that is too close to dividends: it is better to have a little regularly than a lot over a short period only.
It is therefore difficult to make it a criterion in the context of my strategy, especially since this indicator is not easily available for automatic processing. I therefore remain faithful to dividends 😉
For my part, what I look at when a company buys back shares is whether it does so at a good price.
If a company growing at a rate of 12% per year buys back its shares when its P/E is at 20x earnings, this is clearly not a good use of the company's excess funds; it would have been better to pay the amount as a dividend to allow shareholders to reinvest it themselves.
Martin
http://www.investir-a-la-bourse.com
Share buybacks mean that the company has no good investment plans up its sleeve. This can hurt long-term profit growth.
On the other hand, it is also an act of good management because it allows to strengthen equity and reinforces the solidity of the company.
If the company continues to maintain its results and dividend policy, this is a positive sign.
"The fewer buybacks there are, the more sustainable the dividends are and the less the price is affected by one-off parameters."
Not necessarily, the more buybacks there are, the fewer shares there are in circulation, so mechanically less cash to pay a dividend.
I would add that in the end it is not necessary to add a criterion such as share buybacks in my algorithm because it already measures the valuation of the dividend in relation to the share price (Yield). So the algorithm already implicitly takes into account the "perverse" side of share buybacks, which would have no other effect than to increase the price, without being accompanied by an improvement in fundamentals.