Traverse City Record-Eagle

Business

July 2, 2014

Jason Tank: Don't get excited about dividends, buybacks

Q: The financial media certainly gets all excited about increased dividend payments and share buyback announcements. Are they really all they’re cracked up to be?

I’d say both the media and investors get overly excited when companies announce plans to buy back their own shares. And, for that matter, dividend hikes get too much play as well.

The best way to understand this issue is to first go back to basics.

A company, public or private, only has four things it can do with its profits. It’s really pretty simple.

First, a company can reinvest its profits to grow organically. Second, it can use its cash to make an acquisition. Next, it can pay down debt to both save on interest cost and improve its overall financial flexibility. And, finally, it can return excess cash to shareholders through either dividend payments or by doing a share buyback. This set of choices is known as, capital allocation.

Regardless of the choice made, the only thing that should matter to investors is whether or not their capital is being allocated wisely. A key job of the elected board of directors is to monitor the capital allocation suggestions made by their hired executives. Unfortunately, in an effort to reside in the cushy confines of that corporate club, they often fail at their primary responsibility.

This brings me to the truth about dividends and share buybacks.

Business leaders know that dividends aren’t easy to cut once they’ve begun. Paying an ongoing dividend implies a certain level of confidence in its future profitability. Since investor confidence often produces a higher stock price, it is one reason to like dividends. But, it is not a legitimate reason to always choose dividends over the other options available to use the cash.

For example, if a business happens to have a great opportunity to grow, it would certainly be a shame if shareholders were so smitten with their dividend as to actually take a pass on those prospects.

Text Only

the BIZ

AP Video
Arizona Prison Chief: Execution Wasn't Botched Calif. Police Investigate Peacock Shooting Death Raw: Protesters, Soldiers Clash in West Bank Police: Doctor Who Shot Gunman 'Saved Lives' 'Modern Family' Star on Gay Athletes Coming Out MN Twins Debut Beer Vending Machine DA: Pa. Doctor Fired Back at Hospital Gunman Raw: Iowa Police Dash Cam Shows Wild Chase Obama Seeks Limits on US Company Mergers Abroad Large Family to Share NJ Lottery Winnings U.S. Flights to Israel Resume After Ban Lifted Official: Air Algerie Flight 'probably Crashed' TSA Administrator on Politics and Flight Bans Raw: National Guard Helps Battle WA Wildfires Raw: Ukraine's Donetsk Residents Flee Senators Push to End Hamas Threat in Cease-Fire A Young Victim's Premonition, Hug Before MH17 Raw: Deadly Storm Hits Virginia Campground Death Penalty Expert: 'This is a Turning Point' Raw: MH17 Victim's Bodies Arrive in Netherlands
Hyperlocal Search
Premier Guide
Find a business

Walking Fingers
Maps, Menus, Store hours, Coupons, and more...
Premier Guide