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Stock Buybacks Should Get More Credit

April 30, 2014 | About:

We often hear about companies that have a solid record of paying back their shareholders but mostly those that choose to do so through dividend payments. I get it, I’m a big fan of dividend stocks and manage a decent part of my investments by targeting solid dividend stocks in my USDP portfolio. That being said, I also feel like companies that are sung their cash to do buyback programs (where a company buys back its own stock) don’t get nearly enough credit.

It’s not always the case but it’s often much better for most shareholders to have money “returned” to them in such a way. Why?

-Postponing taxes: As many of you know, I hold a decent stake in Apple (AAPL) and intend to keep it in the very long term. When the company pays out a dividend, I’m thrilled to have money come in my account and it makes the payment more “real”. However, when Apple takes that same amount to buy back some shares, there are also benefits:

  • This (all things being equal) increases the value of other outstanding shares which increases the value of my stake. However, I will not pay any taxes on them until I sell my stake (which could be 10-20 years down the line). Not only do I avoid those taxes now but I get to “keep that money invested” while that happens. It’s very likely that I’ll be paying a lower tax bracket by the time I’ll sell my shares and have to pay. Yes, I’ll be paying capital gains instead of income but I’ll have avoided paying taxes for over a decade.

-It can be beneficial for the company: one of the issues that Apple and many companies face is having much of their cash reserves stuck abroad and being unable to bring them back. By using innovative methods, companies like Apple are able to buy back shares using foreign cash and thus avoid paying taxes.

-Usually a good sign: Stock buybacks generally also send a signal to the market that the company’s executives (which should know) think the stock is undervalued and buying back is a good use of cash reserves. While it’s not always the case, it’s been a fairly good indicator.

Why Do These Moves Get So Little Credit?

I personally believe the biggest reason is it’s just harder to evaluate. It’s very easy to determine which stocks pay dividends, for how long, etc. That makes it easy for indexes to track things like dividend aristocrats, sustainable dividend payers, etc. It’d be very tricky to calculate such metrics for stock buybacks because the information is not as easy to get, to compare, etc. Does that make it any less valuable? Where would I even go to find the “best” stocks in terms of historical buybacks, etc?

hlf


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