Buybacks as good as dividends?

Although companies have amassed record stockpiles of cash, their dividend yields remain anemic. Some dividend-loving investors say it’s time for that to change – and companies may be paying attention.

As companies have cut dividends, they’ve increased stock buybacks. But investors say the buybacks are no substitute for dividends.

“What is a dividend but your payment as an owner of the company?” said Joseph Lisanti, editor of S&P’s weekly newsletter, The Outlook. “If you don’t get that, then the only way you can profit from your investment is to sell all of it or part of it. … Otherwise, what’s the return on your investment?”

Corporate management had sold institutional investors on the idea that buybacks, or stock repurchases, by a company are as good as or better than dividends.

Why? After a company buys back stock, those shares are no longer trading, so each share that remains on the market should be worth more.

But that argument became unconvincing while corporations were issuing millions of shares of stock options to their executives, diluting the worth of outstanding shares.

“They were buying those shares to offset the shares they had issued in conjunction with the issuance of options,” Lisanti said. “It was, shall we say, a bit misleading. That may be over at this point, when they are forced to expense options.”