The Enormous Advantage of Great Management

If a company isn’t paying dividends or buying back shares, what is it doing with the money?

Mar 29, 2014 at 8:00AM

As Managing Director and Head of Global Financial Strategies at Credit Suisse, Michael Mauboussin advises clients on valuation and portfolio positioning, capital markets theory, and competitive strategy analysis. He has also authored three books -- Think Twice, The Success Equation, and More Than You Know -- and is an adjunct professor of finance at the Columbia Business School, and chairman of the Board of Trustees at the Santa Fe Institute.

Buying back stock is tantamount to paying a dividend, Mauboussin says, because stockholders can simply sell. But what happens when a company doesn't do either? Is it investing its cash wisely, or simply letting it accumulate?

Now here are some companies who are paying dividends. Healthy ones.
One of the dirty secrets that few finance professionals will openly admit is the fact that dividend stocks as a group handily outperform their non-dividend paying brethren. The reasons for this are too numerous to list here, but you can rest assured that it's true. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.

A transcript follows the video.

Matt Koppenheffer: Then, looking at a specific company, it's not necessarily a bad thing if they don't pay that big dividend -- and I guess that partially goes back to what you were talking about, about investment opportunities within a company.

Michael Mauboussin: That's a great point, Matt. That's the thing. If they're not paying a dividend or repurchasing shares, what are they doing with the money? If they're investing it at a very high rate of return, more power to them.

Koppenheffer: Like Buffett.

Mauboussin: That's what we want. But if they can't, then it's perfectly reasonable -- and I think even appropriate and maybe responsible -- for them to give the money back to the shareholders. The reason is, of course, you in turn can take that money and invest it in something else if you so choose.

By the way, buying back stock is tantamount to paying a dividend, because you can sell. It's interesting; when a company buys back your stock, if you do nothing, it's actually an act of decision, because you're effectively increasing your ownership stake in the company. You can create a synthetic dividend by selling the same proportion as they're buying back, so you'll have a little cash and you'll still have the same proportion of the company. Then you could take this money, you can reinvest it or do whatever you'd like.

But that is an important consideration in the buyback dividend debate is, does the company have investment opportunities they should be funding, or not? By the way, some of the problem is we have some of these companies that are earning so much, they're building up these huge cash balances. They can't even find things to do with the money -- some of these big technology companies, for instance.

Koppenheffer: Just spitballing, would the right thing be for them to start distributing that, if they don't have the place to put it?

Mauboussin: I think the answer is yes, and I think there's been a lot of pressure for them to do that. Slide the money back into the capital markets, and let the capital markets reallocate it if you can't do something with it.

The idea there is that markets are pretty good at figuring this stuff out. It's not perfect, clearly, but pretty good at this. The question is, this company that's sitting on a lot of cash, is there an investment opportunity that's being starved now, as a consequence, if that money went back in?

I think from a systemwide point of view, that discipline of returning cash to the capital markets makes enormous amounts of sense.

Matt Koppenheffer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers