Today I decided to write a post in quite a different convention. Inspired by other bloggers about different watch lists etc. I decided to write some quick thoughts on different companies/market. Before I start I would like to thank you again. After my post Time to buy – Gilead Sciences you published a lot of comments (as it comes for standards of my blog) – once again thanks a lot! I hope we will discuss even more issues
First of all in the last few days we saw bigger or smaller declines on the market. I took my change and bought some Gilead shares – as always, too early and I should have waited a little bit longer. Anyway, no one is perfect. All my 4 previous investments are above cost basis (+ I took some dividends) so it is not that bad.
Now I see many companies which valuation is getting attractive, for example TROW, BEN, CAH, GWW, NUE. Sure, generally valuation on market is expensive and it is hard for particular shares to grow when market is going down, but those names seems to be reasonably valued. Obviously assuming that big contraction on multiples will not happen. Economy is doing quite well and I think that I will collect some cash and buy in case of further declines.
I have also some interesting question. Which company would you prefer (assuming everything else constant):
- A with 4% dividend yield and no buyback
- B with 2% dividend yield + 2% buyback
Sure, this is inspired by Mike’s comment “GILD’s yield is only 2.5% so nothing that is going to get a DGI excited”. Well, it is difficult to answer, anyway, let me try.
From logic/science there is no difference. Return to shareholders is 4% in both cases.
From psychological point of view: in case of dividend you get 4% in cash to hand and in second scenario you get only 2% and 2% is “reinvested” (due to buyback EPS is growing faster) – so A is preferred.
From tax point of view: there is tax on dividends and short term there is no tax on buyback, so B is preferred.
From “Dividend Aristocrat” point of view: in B scenario if company reduce buyback it will not lose Aristocrat status. So choosing company A (and assuming having Aristocrat status is an important goal of management) makes payments more certain.
From value creation point of view: well as I wrote at the beginning there is no difference. Now i think that it is not the case in every aspect. Look at BEN – when share price is low they increase buybacks, so company is buying cheap, which is by far more effective way to redistribute cash. On the other hand when shares are at all time high and company is buying back shares then I see no value added (or even value decline in buying overpriced shares).
Summing up, it is not an easy answer. I personally prefer buybacks as yields are low anyway and I do not need current income from investments – appreciation of capital is more important for me. On the other hand when shares is going down and you see no impact of buyback it is good at least to think “I took some dividends, it is not that bad…”
What do you think? Which option would you choose?