Shareholder Value
The term “shareholder value” can be applied to any actions taken by a company that are viewed to be positives to shareholders. Chief among them are stock dividends, share repurchases, and debt reduction. In a perfect world, every company would be actively partaking in all three. But that’s simply not the case. So if forced to choose among them, which one really plays into an investor’s best interest over the long run?
Dividend payments are one of the absolute cornerstones of stock investing. In fact, when you get right down to it, anything that doesn’t pay you back in one way or another can’t even be considered an “investment”, at least in the strictest sense of the word. Moreover, consistent payouts underscore a company’s cash generation capabilities, while dividend increases demonstrate management’s confidence in the future.
Stock buybacks are good for existing stockholders in that they reduce the total number of shares outstanding. Logic will tell you that, whatever value you place on a company, the fewer shares out, the more each share is worth.
Finally, debt reduction is usually a good sign. It means the company has its act together. It’s generating enough cash flow that it doesn’t need to depend on others to expand. And the bottom line, the less you owe, the lower your interest expenses.
It's All Good, Right?
You would think all of these strategies would be universally viewed as positives, but each has its deterrents. Some argue that money paid out in dividends is cash that could be spent growing the company. This is technically true. But sometimes, growth opportunities are limited. Worse still, management will sometimes waste money on reckless expansion.
As for stock repurchases, sometimes companies (just like individual investors) will overpay for stocks, often just before a bear market sets in. Also, you often run across instances where buybacks are simply used to cover up stock-based compensation, yielding you a net change of zero. Finally, you’ll also find that some companies announce enticing buyback plans, and just simply never follow through.
Lastly, aspersions can also be cast on the act of repaying debt. This is usually brought up when borrowing rates are low, such as they are now. As the argument goes, why pay down debt at miniscule interest rates, if the money can be put to better use invested in something (most likely an acquisition) that will generate a higher return.
Irreversibility
Now there’s a word you don’t usually hear bandied about when talking about investments. But it’s particularly applicable to our discussion. Dividends, buybacks, and lower debt can all be good for shareholders. However, the one quality that favors dividends over the other factors is that they actually put money in your pocket. The others don’t. All things being equal, lower debt and fewer shares outstanding should result in a higher share price. But things are never equal, and oftentimes the markets simply won’t agree with you, such as in periods of general market declines.
More to our point, dividend payments are yours to keep forever. To be sure, a company can suddenly declare a dividend cut or suspend payments altogether. But the company can’t announce that it has suddenly changed its mind and wants its money back on dividends already paid. On the other hand, shares that were repurchased can just as easily be sold back to the market. The same goes for debt reduction. A tempting acquisition or expansion opportunity could pop up at any time, and then it’s back to the bank (or bond and equity markets) for more funding.
