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Special Dividends Trump Share Repurchases Every Time
A recent article I wrote for Investopedia cautioned investors about their enthusiasm for share repurchases. Using four well-known retailers, I showed readers that over an eight-year period between 2002 and 2009, the companies collectively spent $62.9 billion buying back their stock, producing less than stellar returns. In fact, their average cumulative return over eight years was 3.3%. I believe that if you took the share repurchase money and used it for special dividends, shareholders would achieve superior returns. (To read that article, see When Share Repurchases Don't Pay Off.)
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A Classic Example
Back in April I made the case for combining special dividends with timely share repurchases. I no longer feel this way as my research clearly shows buybacks waste shareholder funds. Schiff Nutrition (NYSE: WNI) is one of the companies I highlighted for successfully using this rare form of shareholder reward. Schiff's most recent special dividend (the company pays no regular dividends) cameApril 14, when it paid shareholders 50 cents per share. Based on its stock price at the close of trading March 31, which was the shareholder record date, Schiff shareholders received a 6% pop to their YTD return, which sits at about 14% with three months to go in the year. That's far more tangible than using the $15 million to buy back 6% of its share count.
Four Retailers - Share Repurchases vs. Special Dividends 2003-2010
Share Count
To figure out the total return for each company using special dividends rather than share repurchases, I took the share count at the end of 2001 and divided this number into the total dollar amount of share repurchases over the past eight years. In my October 4 article about share repurchases, I opted to use Sears, Roebuck & Co. information for 2002 through 2004 for the sake of continuity. A reader quite rightly reminded me that Sears Holdings was created when Eddie Lampert's Kmart Holdings bought Sears, Roebuck & Co. for $11 billion in late 2004. Although Sears, Roebuck & Co. repurchased a large amount of stock prior to the merger, one of the worst buybacks came in fiscal 2008 when Lampert bought 21.7 million shares at an average price of just under $135. That's 86% above its current stock price. If you can figure out the sense in this, please fill me in because from where I sit, it's a colossal waste of money.
Are You Getting The Picture?
If you compare the total return of all four stocks to the return on investment (ROI) for its share repurchases, it becomes clear that buying back stock makes little sense. The table below has one additional column; otherwise, it's identical to the one above. The extra column shows the ROI for each company's share repurchases, which I dealt with in my October 4 article. Share repurchase supporters will point out that total returns wouldn't have been as high if the share count hadn't dropped, causing the earnings per share to rise. Maybe so; but a significant amount of research exists to dispel this.
Still, let's assume for a second that buyback proponents are correct. It still doesn't excuse frittering away shareholder funds because management is too lazy or too scared to do something about the state of their business. James Grant, publisher of Grant's Interest Rate Observer, uses the late Henry Singleton, founder of Teledyne, as the best example of how share repurchases are supposed to work. Singleton used expensive Teledyne stock as ammunition for acquisitions and share repurchases when its stock was cheap. There was no in between. Today's CEO buys whenever he or she feels like it with no regard for price. That's just dumb.
Four Retailers - Share Repurchases vs. Special Dividends 2003-2010
The Bottom Line
I'd like to think that there are other excellent allocators of capital out there, but I'm afraid I'd be fooling myself. When you consider that special dividends provide CEOs with just as much flexibility as share repurchases, are much easier to implement, provide shareholders with tangible returns and avoid costly mistakes - I have to wonder why share repurchases overtook dividends in 2004. (For related reading, take a look at A Breakdown Of Stock Buybacks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
A Classic Example
Back in April I made the case for combining special dividends with timely share repurchases. I no longer feel this way as my research clearly shows buybacks waste shareholder funds. Schiff Nutrition (NYSE: WNI) is one of the companies I highlighted for successfully using this rare form of shareholder reward. Schiff's most recent special dividend (the company pays no regular dividends) came
Four Retailers - Share Repurchases vs. Special Dividends 2003-2010
|
Company |
Total Return With Share Repurchases |
Total Return With Special Dividends |
|
Sears Holdings (Nasdaq:SHLD) |
213.2% |
675.8% |
|
Target (NYSE:TGT) |
108.9% |
151.5% |
|
Walmart (NYSE:WMT) |
25.9% |
45.3% |
|
J.C. Penney (NYSE:JCP) |
52.5% |
170.4% |
To figure out the total return for each company using special dividends rather than share repurchases, I took the share count at the end of 2001 and divided this number into the total dollar amount of share repurchases over the past eight years. In my October 4 article about share repurchases, I opted to use Sears, Roebuck & Co. information for 2002 through 2004 for the sake of continuity. A reader quite rightly reminded me that Sears Holdings was created when Eddie Lampert's Kmart Holdings bought Sears, Roebuck & Co. for $11 billion in late 2004. Although Sears, Roebuck & Co. repurchased a large amount of stock prior to the merger, one of the worst buybacks came in fiscal 2008 when Lampert bought 21.7 million shares at an average price of just under $135. That's 86% above its current stock price. If you can figure out the sense in this, please fill me in because from where I sit, it's a colossal waste of money.
Are You Getting The Picture?
If you compare the total return of all four stocks to the return on investment (ROI) for its share repurchases, it becomes clear that buying back stock makes little sense. The table below has one additional column; otherwise, it's identical to the one above. The extra column shows the ROI for each company's share repurchases, which I dealt with in my October 4 article. Share repurchase supporters will point out that total returns wouldn't have been as high if the share count hadn't dropped, causing the earnings per share to rise. Maybe so; but a significant amount of research exists to dispel this.
Four Retailers - Share Repurchases vs. Special Dividends 2003-2010
|
Company |
Total Return With Share Repurchases |
Total Return With Special Dividends |
Share Repurchase ROI |
|
Sears Holdings (Nasdaq:SHLD) |
213.2% |
675.8% |
19.8% |
|
Target (NYSE:TGT) |
108.9% |
151.5% |
6.4% |
|
Walmart (NYSE:WMT) |
25.9% |
45.3% |
4.8% |
|
J.C. Penney (NYSE:JCP) |
52.5% |
170.4% |
(46.3%) |
I'd like to think that there are other excellent allocators of capital out there, but I'm afraid I'd be fooling myself. When you consider that special dividends provide CEOs with just as much flexibility as share repurchases, are much easier to implement, provide shareholders with tangible returns and avoid costly mistakes - I have to wonder why share repurchases overtook dividends in 2004. (For related reading, take a look at A Breakdown Of Stock Buybacks.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
by
Will Ashworth
Will Ashworth lives and works in Toronto, Canada. He's worked in and around the financial services industry for much of his adult life. He loves investing and is passionate about helping others learn how to put their money to work.
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