Are Stock Buybacks Good For Dividend Investors?

| May 12, 2021

buybacksAs I review 2021’s first-quarter earnings results, I have been struck by how company after company announced new or increased share buyback programs.

Companies describe buybacks as “returning cash to shareholders.” I think that is a load of crap, and I have several thoughts on why widespread stock buybacks are a terrible idea.

Alphabet Inc. (GOOG) made big news with its earnings release when it announced a $50 billion share buyback plan. $50 billion! I am amazed that any company has $50 billion of cash lying around.

Alphabet is not alone in its plans, and companies large and small have announced plans to buy in common shares in 2021. The logic behind a buyback is to reduce the number of shares outstanding. With fewer shares across which to spread net income, future earnings per share will automatically be higher. Since most stock valuation derives from EPS and EPS growth, the theory is that buybacks will help drive share prices higher… which leads to reason one why I am not a buyback fan.

In reality, it is impossible to tell if a buyback program helps boost a share price. Prices are too volatile over a year or two to definitively show whether or how a share repurchase program helped investors earn greater profits.

My second reason to not like buybacks is that they show a lack of creativity by a companies’ boards of directors and management. Is buying shares the best idea they can come up with in order to put some money to work in growing the business or boosting the profits? Or maybe it is just a lazy way to make future income statements look better.

Up at number three, I love (not) the “returning cash to shareholders” description that often accompanies buybacks. I have never had a company send me cash as part of a share repurchase program. By definition, buying in shares takes them out of the hands of investors, so investors who sell don’t get the benefit of a buyback. If I want to sell my shares, I can—whether or not the company or another investor buys them. When you look at the results for investors, it’s clear the promise of returning cash to shareholders through a share buyback just…doesn’t.

If a board truly wanted to return cash to investors, the directors could elect to pay or increase a cash dividend. Dividends are cash into your brokerage account!

Over the last few quarters, I have been deeply unamused by companies that cut dividends last year and now want to use share repurchase programs to “return cash to shareholders” instead of starting to regrow the dividends. It really gets me steamed to see this when I’m earning a dividend 50% smaller than what I received for the 2020 first quarter… and yet, the company is repurchasing shares rather than (or even in conjunction with) increasing the dividend. I don’t expect to see a fully recovered dividend, but, geez, at least give me 5% or 10% annual dividend growth.

I can’t help but question whether the sheer number of buybacks may indicate a high point for share prices. I have followed the market and stocks for years, and Boards of Directors have very good timing to buy in shares just before they turn lower. With so many companies playing the share repurchase game, it can be viewed as a powerful contrarian indicator. I am not predicting a stock market decline, but I am wondering.

My dividends strategies focus on the old-fashioned path of returning cash to shareholders. Investing for attractive and growing cash dividends and yields works through all cycles of the stock market.

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Note: This article originally appeared at Investors Alley.

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Category: Dividend Stocks

About the Author ()

Tim Plaehn is the lead investment research analyst for income and dividend investing at Investors Alley. He is the editor for The Dividend Hunter, an investment advisory delivering income investments with double digit growth in share price and dividend payments, and 30 Day Dividends, a specialty income service that takes advantage of opportunities for relatively fast, attractive profits around potential dividend payouts.

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