Dueling Fools: Dividends vs. Buybacks

A company can do several things with idle cash. It can reinvest it in the company. It can pay down outstanding debt. Or it can just let it sit there, collecting interest income. Two other popular uses that materially reward shareholders are cash dividends and share repurchases.

You probably know about dividends. James Early even has a newsletter devoted exclusively to singling out promising stocks with healthy payout policies. As a bonus, many consistent performers have a knack for hiking their quarterly distributions every year. Companies like Hormel (NYSE: HRL  ) and Lancaster Colony (Nasdaq: LANC  ) have kept annual hike streaks going for more than 40 years.

Then you have repurchases. When a company feels that the market isn't valuing its shares accordingly, it can go on the aggressive and announce a buyback. This week alone, Dean Foods (NYSE: DF  ) , Principal Financial (NYSE: PFG  ) , and Dollar General (NYSE: DG  ) have declared share repurchase plans.

Which is the better choice for investors? Would you rather have your dividend greenery up front or relish owning a slightly larger percentage of a company through the retirement of outstanding shares?

One can argue that shareholders win either way, but that would be no fun. This week, Ralph Casale and I are Dueling Fools. Ralph feels that dividends provide a steady income stream and managerial stability, while I prefer to have a company eat its own cooking. Where do you stand? That's what this week's bout is all about.

Duel on!


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