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Suspended buybacks but stable dividends

I have a question related to your recent article titled "Fed Truthers Are Wrong" where you talked about the liability of having investors.

I'm seeing a lot of companies suspend their buyback program but maintain the dividend (e.g, $SBUX, $DEO). This makes no sense in my opinion...

The only reason I for this is to maintain the title of a "Dividend Aristocrat".

What am I missing?

Its behavioral.  A bird in hand is worth two in the bush.


A combination of a few things:

  • There's a stigma around cutting dividends that doesn't exist with buybacks, for whatever reason.
  • Some investors target high dividend stocks for income purposes. Never heard of investors targeting high buyback stocks.
    • Related, dividends can put cash into accounts as soon as they are paid (no reinvestment). Buybacks require selling to get cash.
    • Buybacks are also less tangible. You know the dividend you are going to be paid ahead of time. You do not know the 'gain' from a buyback.

That said, now is the time where buybacks would be most effective - when share prices are lower.

Well, there are investors that are savvy enough to overcome their cognitive biases and factor buybacks into the equation.  If you're going to view a business as a discounted stream of future cash flows, then there is no difference between a dividend and a stock buyback.  To look at only one symptom is merely a fraction of the whole.

It's called Shareholder Yield and it should also account for debt repurchasing and option issuance dilution issuance also, hence it becomes Net Shareholder Yield.

But honestly, only old people are worried about dividends and you can't teach an old dog new tricks when they only want "their" dividends pried from their cold dead hands.

Buyback yield would probably be a more widespread factor if it was easily provided by the media, but therein lies a possible edge.



I think MST makes some good comments. Firms don't like to cut dividends because of the stigma. Of course, that's totally backwards, but the people just hates buybacks and loves dividends even though they're both capital distributions. It's pretty stupid especially since dividends are so much less tax efficient, but whatever....

So, long story short - you're not missing anything. It is stupid to cut the buyback now and keep the dividend.

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