Forget The Dividend, Buy More Shares
Baskin Financial Blog | Jan 09, 2013 12:21PM ET
In a recent white paper, famed investment thinker Michael Mauboussin raised an interesting question to shareholders: If you own the shares of a company because you believe the stock is undervalued, why would you ever want the company to pay a dividend instead of buying back shares? Most shareholders will say, why not receive a tangible bird in the hand now in the form of a dividend instead of waiting for value that may or may not surface?
A Question Of Allocation
Finance professors will tell you that rational shareholders should be indifferent when it comes to a dividend vs. a share buyback. When receiving a dividend, the shareholder has to pay tax on the income and then make the tough decision of how to allocate the capital in the most efficient manner. A share-buyback removes the capital allocation decision from the shareholder, defers the tax and in due course should lead to a higher share price. That’s all well and good, the shareholder will answer the professor, but look at all those high-tech companies like Cisco (THI ) P/E 18.3 ROE 35%Disclosure: The author owns shares in Viacom and Tim Hortons. Clients of Baskin Financial own shares in all three companies mentioned above.
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