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In its March Investor Overview presentation, PPG stresses that approximately 80% of cash from operations is returned to shareholders. In 2011, it increased its dividend for the 40th consecutive year and repurchased approximately $850 million of its stock. It goes on to discuss the $7 billion in revenues acquired over the last 15 years, transforming it into a coatings and optical business. In the past decade, it has deployed approximately $12 billion, 60% of which went to growing its businesses, with the remaining 40% returned to shareholders. It's all very impressive.
However, if you look at the last three years, you'll see that it repurchased $1.5 billion of its stock at an average price of roughly $75.91 a share. Over those same three years, it paid out $1.1 billion in dividends. There are two things wrong with this picture: first, its stock hit a high of $97.81 in April 2011 and a low of $28.16 in March 2009; yet it repurchased only $59 million of its stock in 2009 and $850 million in 2011. Secondly, because it's repurchased so much stock over the past three years, it actually paid out $5 million less in total dividends in 2011 than the year before, despite increasing its annual dividend for the 40th consecutive year. That hardly seems fair to shareholders.
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PPG trumpets its return on capital in 2011, a result unseen since 2008. However, when you consider that its invested capital has basically remained flat since the beginning of 2009, thanks to the way it deploys excess capital, any increase in earnings would jumpstart return on capital. Is it any wonder then that the long-term compensation of its executives is based on growing earnings per share (EPS) an average of 10% over a three-year period while achieving an average price rate of change (ROC) of 12%? By favoring share repurchases over dividends, management is able to more easily hit the first target, and by returning capital to shareholders (as opposed to holding cash) is able to hit the second. Despite its best efforts, PPG's stock still underperforms Valspar Corp (NYSE:VAL) and Sherwin-Williams (NYSE:SHW) in the five-and ten-year returns.
Fifteen banks passed the Federal Reserve's annual capital stress-test, including American Express (NYSE:AXP). No sooner had the results come out that most of the banks were announcing large dividend increases and even larger share repurchases. American Express announced it is buying back $5 billion in stock within two years and upping its quarterly dividend by 11% to 20 cents a share. Cue the flood of new investors. However, I wouldn't be so fast to rush in.
From the beginning of 2006 to the end of 2011, American Express has repurchased around 200 million shares for $10.8 billion or an average of about $53.45. In that time, its stock has traded as high as $65.89 and as low as $9.71 (in November 2008). Averaging its high and low for the six-year period, I estimate Amex overpaid by $3.2 billion. Excluding dividends, its stock's delivered almost no return. If management instead paid out the $10.8 billion for additional dividends, shareholders would have been far better off. My estimate, assuming a higher share count because shares were issued but none repurchased, is roughly $1.30 per share per year. This amount assumes Amex would continue to be able to make its preferred share commitments as nothing in its business changed except the share count. If management had paid this dividend, which is 63% higher than the hike it just announced, I'm confident its stock would have done much better. In my experience, share repurchases generally don't work as well as dividends do.
Jamie Dimon, CEO of America's biggest bank JPMorgan Chase (NYSE:JPM), recently called out journalists for being overpaid; this coming from a man who made $23 million in 2011. Laughter aside, Dimon announced March 13 that it was ready to start buying back its stock in earnest. JPMorgan's board approved a $15 billion share repurchase program with $12 billion slated for 2012.
In addition, the bank is hiking its quarterly dividend by 20% to 30 cents a share. Investors are supposed to get excited about this announcement. However, think back to October of last year, when Dimon was forced to apologize because management bought back $4.3 billion of its stock at an average price of $42.91 a share, only to see its share price drop by around 26% in the third quarter. It has since recovered, but now Dimon wants you to believe he'll handle $15 billion with greater care than he did the smaller sum. As many scribes have written in recent days, the bank should have increased its dividend by more than 20% instead, foregoing the losing proposition of buying back stock. I couldn't agree more. This is another classic example of management wasting shareholder money.
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The Bottom Line
Dividends, in my opinion, will always be a better source of shareholder remuneration than share repurchases. They are tangible in nature and have a much greater influence on share prices. If you own a stock in a company that's got the cart backwards, maybe it's time to consider they're wasting your money. It's a just a thought.
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At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.