The best buy signal to invest in US stocks has been when companies drastically reduce buying back stock.
That occurred in 2008 - 2009 and in 2020.
Source: S&P Global
Companies tend to initiate share buybacks when share prices are high, and they are flush with cash. Then they end up cancelling them, or not going through with the share buybacks, when share prices are low. This is the opposite of how you should be buying shares in my opinion.
On the other hand, companies tend to maintain or even increase dividends, even during a downturn.
I prefer the relative stability, predictability and dependability of the dividend payments over share buybacks. With dividends, I have the option to reinvest into the stock or put the money to work elsewhere. Once a company declares a dividend, it tends to stick to this schedule. I like this consistency, because it reminds me of successful investing. Successful investing is about consistency.
With buybacks, I don't have this option - company management allocates excess cashflows to their stock, whether or not it is a good value. They do buybacks when they are flush with cash, rather than on a consistent and predictable schedule. Companies seldom care about valuations with share buybacks. They also do buybacks when they feel like it. While I could be taxed on the dividend, there are multiple ways to eliminate or defer paying taxes (for US shareholders). A large portion of investors in US stocks are not taxed (e.g. pension funds, endowments, retirement accounts). Given the short holding periods for US stocks, taxation is a moot point. Share buybacks remind me of the futile attempt to time the market, which are seldom consistent and often disappoint. Consistency in dividend policies beats doing things when you feel like it (like buybacks).
I like the predictable nature of dividends, because I know exactly how much is going to be allocated. It's better to buy stock with dividends regularly, rather than when some executive feels like it (like they do with buybacks). Buybacks are definitely more discretionary than Dividend policies.
Canceling a buyback or not going through with it is rarely noticed or mentioned, because they are treated as a lower priority by company managements. Canceling a dividend is definitely viewed negatively, because it signals problems with the underlying business. A dividend is more visible to the investing community than a buyback, hence dividend announcements get more publicity.
A track record of annual dividend increases speaks volumes to the stability and dependability of long-term cashflows for a business. This is what causes me to research and potentially invest in a stock, provided the valuation is not too excessive.
In general, I believe that dividends are better than share buybacks.
That's because dividends can accomplish everything that buybacks can supposedly accomplish, but in a much more efficient, consistent and dependable way.
I like the fact that cash dividends provide the investor with the option to invest back in the company, or invest in the best available opportunity for them. A buyback makes that decision for them. Options have value.
This ends my rant of the day.
Relevant Articles:
- Dividends versus Share Buybacks/Stock repurchases
- Share Buybacks and Dividends Are Not The Same Thing
