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Buybacks, Dividends, or Neither: Which Should Investors Prefer?

By Motley Fool Staff – Nov 28, 2018 at 9:38AM

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Should companies give cash directly to investors, repurchase shares, or reinvest profits back into the business?

On Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, recently discussed Visa's (V 0.25%) meager dividend yield, which Moser would like to see climb.

Frankel argued that while dividends are great, Visa shareholders who believe in the company's potential should love the aggressive buybacks. In this clip, Moser responds to a listener question about dividends, buybacks, and reinvesting profits back into a growing business.

A full transcript follows the video.

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This video was recorded on Nov. 26, 2018.

Jason Moser: "I have a question about the war on cash podcast from November 19th, 2018. Jason and Matt mentioned that they like the buybacks of Visa, but are OK with small dividends to fund future growth. I'm confused. Don't both buybacks and dividends decrease the amount of cash to fund future growth?" He goes on to say he would personally prefer dividends over buybacks. That's cash in the pocket. But on the other hand, increasing dividends generally represents a much stronger commitment by management in the faith of the business because companies generally do not like to cut the dividend, and dividends provide a more direct reward to shareholders.

Landon, you make a very good point here. Regardless of whether it's a dividend or a buyback, the company has to fund that one way or another. When you have a business like Visa, or MasterCard for that matter, that is as big as they are, and have very high-margin business models, as they both do, the nice thing about that type of investment opportunity for investors is that while the growth is going to be there, the growth will generally be organic, and it'll be tied to general consumer spending. These are business models that generate a lot of surplus cash. They have to do something with it. There's only so much they can reinvest in the business before they start getting a little bit outside of their circle of competence, and you start seeing some deteriorating returns on those investments. So, you reward your shareholders either through a dividend or share repurchases.

I tend to prefer dividends, just because, like you said, Landon, they are cash in the pocket. But by the same token, these companies do know that material buybacks over the course of time can play out on the share price. The fact of the matter is, when you reduce that number of shares outstanding, that's going to give you a little bit of a different look on the value of those shares. It should, in theory, make them a little bit more expensive over time.

All in all, we like to see a healthy mix there, and feel like, with Visa and MasterCard, perhaps the opportunity there is to grow that dividend a little bit more substantially over time. That's what we'll be hoping that they do.

Jason Moser owns shares of MA and Visa. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends MA. The Motley Fool owns shares of Visa. The Motley Fool has a disclosure policy.

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