Over the last three years, a host of companies in the United States and increasingly, in Europe and Japan, have substantially boosted stock buybacks. The idea behind a share buyback is to reduce the outstanding float of share capital as the company buys back its stock in the open market, thereby increasing the value of its stock price. Several funds and ETFs worldwide have been introduced riding this strategy -- supposedly boosting the value of companies' stock prices that issue buybacks.
But evidence suggests investors would be better off with dividends.
According to Standard & Poor's, U.S. buybacks surveyed over the last 18 months through June 30 resulted in poor stock performance.
S&P found that only one of every four of the 103 companies that repurchased shares outperformed the index. And adding more insult to injury, S&P also discovered that the most aggressive buybacks resulted in the weakest stock price performance.
I've always liked dividends. There's no gimmicks or schemes with dividends. Either your company is making money and pays a dividend or cash to shareholders, or it doesn't. Dividends are real money and contribute to approximately 50% of a stocks' total return over the long-term. Share buybacks, I think, do nothing to materially increase the long-term wealth of shareholders.
If a company has nothing better to do with its cash, then either issue a dividend or recycle that cash into capital spending to boost the bottom line. Buybacks are a waste.
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