My fellow Fool Rick Munarriz put a lot of shimmy and shake into his arguments for share buybacks, and he had a good beat. But if you like your investing (and your music) meaty, then show me that cash.
Quoting Warren Buffett is an excellent way to support an argument, but it only takes a quick look at the last Berkshire Hathaway (NYSE:BRKa) 10-K filing to deflate it. True, the company doesn't currently pay a dividend -- but it's not buying back shares, either.
Did Rick really have to reach all the way back to 1984 to find the Oracle of Omaha supporting share buybacks? Back then, I would likely have supported them, too, considering the different tax structures in the early '80s. With many investors now paying a historically modest 15% tax rate for both long-term capital gains and qualified dividends, the arguments from the 1980s no longer apply.
In fact, I found support for my contention that share repurchases support generous option grants in the 2005 Berkshire Hathaway shareholder letter. In a mocking passage, Warren Buffett writes: "Take, for instance, ten-year, fixed-price options (and who wouldn't?). If Fred Futile, CEO of Stagnant Inc., receives a bundle of these . his self-interest is clear: He should skip dividends entirely and instead use all the company's earnings to repurchase stock." Well said. Shareholders should remember that share buybacks don't always serve their interests.
And while Rick called dividends a form of surrender, nothing could be further from the truth. Instead, they help recognize shareholders' ownership stake in a business. Owners should be rewarded for holding shares in a successful business, and nothing says that more effectively and immediately than putting cash directly in the owner's pocket.
It would be wrong to imply that I don't like buybacks; I just don't prefer them. As a "dividend guy," I nonetheless agree with Nathan Parmelee that buybacks can be more beneficial, when done right. But that's a heck of a qualifier.
Buybacks are not neutral to a company's share price; executing one properly involves the very un-Foolish need for a company to time the market. Companies that announce share buybacks often fail to fully follow through on them for just this reason -- or worse, proceed with the buyback despite high share prices. On the other hand, it's very rare to see a company fail to execute an announced dividend, and I've never seen one "restated."
The combination of cash payouts and prudent share buybacks may well be the most effective way of rewarding shareholders. I can't help but salivate when I look at a business like Coca-Cola (NYSE:KO) and see a robust 2.6% yield that's not an undue burden on the free cash flow, a regular annual increase in the dividend, and a steady decrease in the shares outstanding through a repurchase program. Now that's a business that's truly treating its owners well.
Think you're done with the Duel? Think again! Go back and read the other three parts, then vote for the winner !
Fool contributor Ralph Casale is mostly annoyed with Rick's argument because he can't get that Sir Mix-a-Lot song out of his head. He holds no financial position in any of the firms mentioned. Coca-Cola and Berkshire Hathaway are Inside Value picks. The Motley Fool has a disclosure policy.
