Are any investors so hungry that they demand to be fed immediately? My fellow Fool Ralph Casale equates dividends to instant gratification, implying that repurchases represent some distant meal in the far-off future.
Not quite. We have limited this argument to buybacks versus dividends, as opposed to the third option of plowing that money back into the company. In that framework, the end result of repurchases is a meal that can be savored every three months, as earnings per share benefit from being divided into fewer outstanding shares. Enjoy the fish, Ralph. I'll take the rod and Fly Fishing for Dummies book, please.
Ralph makes plenty of great points. Still, I have to disagree with his notion that shareholders are best served by management that's constrained by the need to keep cranking out lofty dividends. I'm buying into a company because I have faith in its executives' decisions. I don't want a business to maintain the status quo just so it can keep cutting tens of thousands of small checks to shareholders. That would be stifling.
Two months ago, Ford
Even when a company is shackled to a dividend, there's no guarantee that the payouts will continue. If anything, the awareness of so many shareholder mouths to feed probably puts more pressure on management, becoming an additional layer of suffocating overhead to cover.
Ralph also points out that investors can reinvest their dividends to increase their stake in the company. But that reinvestment is a taxable event, not to mention a bookkeeping hassle, since your cost basis is disrupted every three months. You know what a thinking investor's dividend-reinvestment plan is? That's right -- it's a corporate buyback. You get the same end result without the Schedule B paperwork, much less the need to buy finance-tracking software just to account for all those tiny reinvestments.
That said, I have nothing against dividends. I'm a big believer in many of the dynamic dividend payers singled out by the Motley Fool Income Investor newsletter. However, when it comes to being a shareholder, I'm an investor first, and a pinata-whacker second.
Keep me hungry, Wall Street. The buyback feast is the only meal worth waiting for.
Longtime Fool contributor Rick Munarriz is a fan of buybacks, but he does not own shares in any of the companies in this article. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.