Posts filed under “Dividends”
Laurence Fink, chief executive officer of Blackrock Inc., the world’s largest money manager with more than $4 trillion in assets, recently issued a warning to U.S. companies: Stop focusing on short-term returns at the expense of longer-term investments.
“It concerns us that, in the wake of the financial crisis, many companies have shied away from investing in the future growth of their companies. Too many companies have cut capital expenditure and even increased debt to boost dividends and increase share buybacks.”
Fink made these comments in a letter to the CEOs of the companies in Standard & Poor’s 500 Index, referring to stock buybacks and dividends as a form of “short-termism.”
What were the longer-term investments he suggested? “Innovation and product enhancements, capital and plant equipment, employee development, and internal controls and technology.” I find it hard to disagree with him.
Stock buybacks and cash dividends totaled $214.4 billion in the fourth quarter of 2013. That is the highest level since the record high of $233.2 billion in the final quarter of 2007, according to the Wall Street Journal. Compare that to the second quarter of 2009, when buybacks and dividends totaled a mere $71.8 billion.
Buybacks tend to boost per-share earnings as corporate net income is applied to a smaller base of stock outstanding. Higher earnings per share can justify an increased stock price. In an era of low bond yields, dividends are an income stream that also gives the investor potential capital appreciation.
Both of these forms of financial engineering have helped to drive U.S. equity prices higher. However, unless a company wants to go private, it can’t buy back its stock forever. Dividends are limited by a company’s earnings.
Companies only have a finite amount of cash to invest. Whatever gets spent on buybacks and dividends is that much less available to be spent on investments in employees, research and development, and capital expenditure. It’s basic arithmetic.
When will the next round of capital investment begin in earnest? As soon as you figure out the answer to that question, you will have gained significant insight into the direction of the economy as well as the next phase of this stock-market rally.
Reading through the classic textbook, Technical Analysis of Stock Trends, last night I stumbled upon a stunning stat comparing the returns of a strategy using Dow Theory versus buy and hold. Using Dow Theory buy and sell signals would have turned an initial investment of $100 in 1897 into $492,597.38 by the end of 2010. …Read More
Click to enlarge Great chart via Josh from WisdomTree regarding MidCap Dividend payers. Source: WisdomTree Research Jeremy Schwartz and Tripp Zimmerman The Forgotten Dividend Payers: Mid- & Small-Cap Equities, April 2013
Interesting discussion in the office today with some of our analytical team: Will any of the cash rich companies who have been sitting on the fence about issuing dividends reconsider their positions? What about a one time special cash dividend before the tax rates go up next year? Think of companies like Apple (AAPL), Berkshire…Read More
Over the last few weeks, we have discussed the questionable data and mediocre results of Jeremy Siegel’s Stocks for the Long Run (See this, this and this). When we step back and take a look at The Really Long Run, we see a much clearer picture. The deep historical perspective as it pertains to the…Read More
Doug Kass on Donald Luskin: Many are concerned that a combination of higher tax rates and lower spending puts the U.S. on a fiscal cliff at year-end. (CNBC’s Maria Bartiromo has been particularly vocal about the subject.) On the tax point, Don Luskin wrote an op-ed in The Wall Street Journal over the weekend,…Read More
Invictus here. A few items of interest (I hope) that I’ve been thinking of lately. What Type of Jobs Recovery Are We Having? Everyone’s seen Bill McBride’s employment chart, which he dutifully updates every month (along with just about every other economic release that comes out). Bill’s chart shows the percent change in employment relative…Read More
Bloomberg Businessweek – The Confusion Over Stock Dividends Yet treating stocks as income-generators comes with a cost. “Rather than viewing dividend stocks as a way to capture extra yield, in the past we have stressed that dividend stocks should simply be viewed as a slightly less risky form of stock investing,” Jim Bianco of Bianco…Read More