ONE BATTLE that I used to fight (in an earlier incarnation) was the idea that stockmarket valuation measures should be adjusted to take acount for share buybacks. Dividend payments were old hat, I was told; companies are returning cash to shareholders more directly (and tax efficiently). This was a very popular argument in the late 1990s when shares looked very expensive on a dividend yield basis.
The counter-argument was always that buybacks were less reliable. It is far easier to let a buyback programme simply drop than to cut a dividend, which usually guarantees an immediate fall in the share price. In addition, if you allow for buybacks at the overall market level, you should also allow for rights issues, option issuance and all the rest of it.
But we are discovering how quickly buybacks can disappear. Figures from Moodys suggest US buybacks more than halved to $395 billion in 2008 from $831 billion in 2007, a year when cash dividend payments fell just 1%. Both will fall even faster this year.
James Montier of Societe Generale has figures showing the net amount of buybacks, after allowing for option issuance. That number turned negative last year. However bad dividend cuts become, at least that won't happen. Over the period from 1989, Montier calculates that only 30% of announced buybacks have turned into net returns of cash to shareholders.
Andrew Smithers of the consultancy Smithers & Co has argued in the past that the stockmarket was being held up by corporate buying. (US banks spent $25 billion a year on buybacks in 2005-2007; bet they wish they had hung on to that money.) The disappearance of those buyers is yet another reason why the market has been so weak over the last six months.
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Since companies already pay income taxes, dividends should be tax free, period. In Canada, we gross up dividend income than a apply a credit which is supposed to compensate for the corporate taxes paid.
For some reason, the credit never really covers it.
Dividends ought to be tax-free at the corporate level, not the individual. All income ought to be taxed in the same way, capital gains after adjustment for inflation.
This is a great blog actually. I love how all of these "new paradigms" of bull markets get completely shot down when the trend reverses, much like when internet stocks apparently didn't need to make profits.
But I don't think that div yield investing is going to be effective either but as you say, at least it can only go to zero! (I assume CEO's aren't going to come knocking at our doors demanding divs back!)
If companies are net issuers of stock (and I don't doubt that they are) it tells you that all of the ratios that equity strategists are telling us indicate stocks are "cheap" and "a steal" go even lower soon because it's clearly cheaper to access the equity capital markets than the credit markets.
negative buybacks...you mean, companies are net issuers of stock!? How dare they access the credit markets!
Everyone is focused on the straw that broke the camels back. Is it the last straw that is responsible, or should blame be shared with all the straw loaded previously?
The housing bubble/sub prime crisis broke the banks, fine. But there is a confluence of trends that were not healthy.
The preferential treat of capital gains which motivated managers to pump their stock price as opposed to paying dividends to shareholders, add to that the juicy stock options. Can you say moral hazard?
Other trends are demographics, etc.. Even the enviro guys with their recycling, reduce, re use. 2 out 3 r's ain't good for spending!
It would be the right time to tackle some of these other issues as there would be very little squawking. Most investors probably have enough loss carry forwards to last them awhile.