[joslicx]

Originally Posted by thirugata

All that 100 Rs you got was deducted from the share value, else it would have been 350 instead of 250 now ( roughly to make the calculation simple), thats the point.

Theoretically, yes.
Practically, it's a bit more nuanced. It's like stock splits or bonus shares. These kind of financial engineering does prop the share many times! Just check what happened to Banco India (an auto ancillaries stock) when it declared a dividend of 20 rupees recently (stock price was around 100 at that time). Stock instantly shot to 170s!

[thirugata]

Originally Posted by joslicx

Theoretically, yes.
Practically, it's a bit more nuanced. It's like stock splits or bonus shares. These kind of financial engineering does prop the share many times! Just check what happened to Banco India (an auto ancillaries stock) when it declared a dividend of 20 rupees recently (stock price was around 100 at that time). Stock instantly shot to 170s!

There are enough examples in stock market where declaring dividend has been used as a tactics to increase interest in stock allowing promoters to sell at a gain. As you said, its bit more nuance than what it appears to naked eye.
But my only point about dividend was companies dont pay you dividend. Its your money deducted from the shares you are holding and transferred into your bank account. And thats the fact.

[SmartCat]

Originally Posted by thirugata

BTW, there are enough companies with substantial debt give dividend. You can check the tata steel and tata motor for example. ( Using these names just for exaple they were in top of my mind, not indicating these companies are bad)

You have to look at debt to equity ratio rather than debt in absolute numbers. I prefer looking at interest costs divided by Operating profit. If it is more than 25%, I avoid such companies.

Tata Motors does not pay dividends.

Originally Posted by thirugata

There are enough examples in stock market where declaring dividend has been used as a tactics to increase interest in stock allowing promoters to sell at a gain.

The company should have a long track record of paying substantial dividends. Not just one year. One glance at screener.in gives you a company's 10 year dividend payment history. Eg: TCS




For those unaware as to what dividend payout % means: if TCS showed a profit of Rs. 38,000 cr and dividend payout % is 40%, it means they paid Rs. 15,000 cr as dividends. You cannot fake this number or force such payments by taking bank loans year on year for 10+ years.

[whitewing]

Originally Posted by SmartCat

Now what happens when a company does a buyback of Rs. 1,000 cr? What about shareholders who do not tender their shares in the buyback? What exactly are they getting?

Well, if one concedes that the market price of a scrip (all other things considered equal) is the value of the fractional ownership.
It then gives that those who did not tender the shares were rewarded with a larger fractional ownership of the company.
Those who do not want the reward of increased ownership get the chance to be compensated via the buyback.

While this may result in goldplating of the PE ratio, without any change in the fundamentals of the business. But that per se is not malpractice isn't it?

Can you please elaborate why you view buy back as "waste of money" compared to dividends?

Originally Posted by thirugata

All that 100 Rs you got was deducted from the share value, else it would have been 350 instead of 250 now ( roughly to make the calculation simple), thats the point.
BTW, there are enough companies with substantial debt give dividend. You can check the tata steel and tata motor for example. ( Using these names just for exaple they were in top of my mind, not indicating these companies are bad)

Completely agree with you on the practice of debt ridden companies giving out dividends.
It depends on the company we are discussing, if this is a company which is generating enough profits AND it knows it cannot re-invest it profitably, then a I would rather hope that the surplus finds it way back to the shareholder via dividend/buyback, rather than the company start investing in mutual funds or speculative businesses.

[carboy]

Originally Posted by thirugata

In my opinion, dividend paid by a company is profit sharing is the biggest marketing gimmick used by advisors to make you buy these shares.

No, it's not.

Originally Posted by thirugata

Because what you get paid as dividend get deducted from the share value you are holding.

Yes & that's why it's called sharing the profits. There are 2 things which a company can do with it's profits.

1) Reinvest in into the company - i.e. build new factories, start new projects

or

2) Share it among the owners as dividend or through buyback

Now how should they decide which of these 2 methods they should use or what mix of the 2 methods they should use. It depends on what they expect from the investment. If their current ROIC is x & they expect the same ROIC or more from their reinvestment of profit, then they should reinvest else they should give it back to the owners. Other than that, let's say the economy is doing well, their sector is doing well & they have made a lot of profits. Now they reinvest it into expanding the business. The economy turns, their sector turns or they get more competition or something happens then their new investment turns lossy, then you have essentially squandered the profits already made. Benjamin Graham used to say companies should return at least 66% of all profits made to the owners. However, this never happens but still dividends & buybacks are good things for shareholders a lot of times. The total return for a shareholder is always price appreciation + dividend. Dividend does come from the pie should price goes down, how it's the shareholder who gets the money - it's like you eating part of the pie instead of waiting for a week & seeing the pie go bad.

[thirugata]

Originally Posted by whitewing

if this is a company which is generating enough profits AND it knows it cannot re-invest it profitably, then a I would rather hope that the surplus finds it way back to the shareholder via dividend/buyback, rather than the company start investing in mutual funds or speculative businesses.

I have nothing against the dividend paying companies nor i disagree with how it can be used as one of the ways to shortlist for investment. But the only point I disagree is "surplus finds it way back to the shareholder via dividend". This myth about dividend is not true, if company is sharing the excess money/profit they have that value should not get deducted from the CMP of stock.
CMP 100 Rs , 4 Rs dividend does not become 104, it becomes 96+4 thats the the only point I had. I have nothing else to add to this topic now.

[SmartCat]

Originally Posted by whitewing

Well, if one concedes that the market price of a scrip (all other things considered equal) is the value of the fractional ownership. It then gives that those who did not tender the shares were rewarded with a larger fractional ownership of the company. Those who do not want the reward of increased ownership get the chance to be compensated via the buyback. While this may result in goldplating of the PE ratio, without any change in the fundamentals of the business. But that per se is not malpractice isn't it? Can you please elaborate why you view buy back as "waste of money" compared to dividends?.

Share buyback is almost a fraud, not just malpractice.

Slighter larger fractional ownership (aka higher EPS) is not a "tangible" benefit to a shareholder, but money in the bank (in the form of dividend) is. Basically, Rs. 1,000 cr has now vanished from GAIL's bank account and most shareholders got nothing tangible out of it. It is almost a fraud because those who know what is a buyback (mostly promoter, hedge funds, mutual funds, institutions, HNIs) will participate in it, and collect payments. The small retail investor, who does not really understand what buyback is, does not get anything tangible. In GAIL's example, Govt of India pulled out Rs. 700 cr from the company, while other shareholders are left with "rise in EPS".

Rise in EPS is not a tangible benefit, because stock markets do not care about one time rise in EPS. Heck, investors these days don't even care about non-existence of EPS (paytm, nykaa, zomato etc)

Buyback is prone to misuse. Hedge funds in United States forced General Electric to take bank loans and buyback its own shares. Hedge funds booked out at a tidy profit, but almost killed off General Electric. So because of greed of a few individuals, 100+ year institution like GE is on sick bed.

GE's $24 billion buyback boondoggle
https://money.cnn.com/2018/03/23/inv...elt/index.html

[thanixravindran]

Originally Posted by joslicx

Vedanta made an open offer to its shareholders for delisting (at around 90 rupees I think) couple of years back.
That failed and it didn't get delisted. Since then, in the last two years, it has paid more than 100 rupees as dividend and is still available at Rs 254.

I believe there is a slight difference between buy back and delisting. A company can announce a limited buy back without delisting offer. It is generally done when there is a good cash pile and may want to distribute to shareholders (no good use of the cash pile like investment or acquisition) sometimes with pressure from institutional minority shareholders and to shore up investors sentiment. It will result in slightly better EPS due to less outstanding stock.

[thirugata]

And for all those, who think dividend is profit sharing by the company, check the following example:
Lets assume company holds 1,00,000 Cr in equity.

CMP 100 RS, 4 Rs divided.

What you get as a share holder 4 Rs in bank account 96 Rs become CMP. Net addition to your asset = 0.

For company: 96,000 Cr in equity, 4,000 Cr in bank account.

Company gets to reduce their equity position without selling the stake and they call it profit sharing.

I leave it to your intelligence to decide how a company reducing its equity position can be a positive thing.

[carboy]

Originally Posted by SmartCat

Slighter larger fractional ownership (aka higher EPS) is not a "tangible" benefit to a shareholder, but money in the bank (in the form of dividend) is.

Stock price increases with buyback. So the moment the buyback happens, you as a retail stock holder can sell a portion of your total stock to get back the money & keep the remaining which will still be the same value as before the buyback - thereby converting the buyback into money in the bank

Originally Posted by SmartCat

GE's $24 billion buyback boondoggle

You are mixing up the principle of buyback with the implementation in a specific case.

Here is a famous article about stock buyback in Harvard Business Review.

https://hbr.org/2001/04/is-a-share-b...r-your-company

Properly applied, a share buyback can help a company significantly enhance its value to shareholders. Managers must ask themselves if they are embarking on the buyback for the right reasons, and they should take pains to make sure that the way they implement the buyback is appropriate to their goals. Managers who do not take the time to think through these issues carefully may well find that their buyback backfires.

[SmartCat]

Originally Posted by thirugata

And for all those, who think dividend is profit sharing by the company, check the following example: Lets assume company holds 1,00,000 Cr in equity. CMP 100 RS, 4 Rs divided. What you get as a share holder 4 Rs in bank account 96 Rs become CMP. Net addition to your asset = 0.
For company: 96,000 Cr in equity, 4,000 Cr in bank account.
Company gets to reduce their equity position without selling the stake and they call it profit sharing. I leave it to your intelligence to decide how a company reducing its equity position can be a positive thing.

All this stuff is a bit "bookish". Now imagine this (admittedly improbable) scenario:

Let's say you invested Rs. 100,000 in ITC 10 years back. You would have collected Rs. 1 Lakh (random number) as dividends over the past 10 years.
Now let's say GoI bans sale of cigarettes one fine day. ITC share value will go down by 90%. But the shareholder is still fine with it, because he has already got his principal back.

If ITC had NOT paid out dividends and had reinvested entire profits into cigarette business, the entire capital is wiped out. Investors would have got nothing.

Basically, you are assuming that a company reinvesting 100% its profits is always a good thing. It is NOT. Promoters/management can make mistakes. They can make silly billion dollar acquisitions so that they appear on Forbes magazine. Father might be a hard working guy (Eg: Dhirubhai Ambani) but son can mess things up (Eg: Anil Ambani). Even otherwise, because of change in business environment, a company can suffer (Eg: Bharti Airtel in telecom industry).

Originally Posted by carboy

Stock price increases with buyback.

Stock price increase is not "guaranteed". If there is a market correction, even a buyback stock will crash. Conversely, if there is a sudden minor bull market, all stocks will rise - not just the buyback-wala stock. Read the original post that triggered this debate:

Originally Posted by fordday

GAIL. Last month they went for buyback of shares. Post which the price crashed instead of going up.
Are these events beneficial to the minority shareholders?

So the moment the buyback happens, you as a retail stock holder can sell a portion of your total stock to get back the money & keep the remaining which will still be the same value as before the buyback - thereby converting the buyback into money in the bank

You are a knowledgeable investor, and you will do it. But not others and that's the point. It is unfair to shareholders who are not aware of what a buyback is.

[thirugata]

Originally Posted by SmartCat

All this stuff is a bit "bookish". Imagine this (admittedly improbable) scenario:

.

What i mentioned is pure math and fact. The example you gave is hypothetical.
You can achieve the desired result of taking out your principle from any stock by partially selling your holdings, if that is the objective or insurance to manage the risk. Mathematically it works out to be the same.
My only point was and is, dividend paid is not profit shared with share holders as you dont get anything extra, its the way for company to move the money from equity to cash.
You can use dividend payment as anyway which you like to analyse the company. And I believe in stock market most popular view need not be the right view.

[whitewing]

Originally Posted by SmartCat

Share buyback is almost a fraud, not just malpractice.
....
In GAIL's example, Govt of India pulled out Rs. 700 cr from the company, while other shareholders are left with "rise in EPS".
...

Buyback is prone to misuse, especially in companies that do NOT have a promoter and is management led. Hedge funds in United States forced General Electric to take bank loans and buyback its own shares. Hedge funds booked out at a tidy profit, but almost killed off General Electric. So because of greed of a few individuals, 100+ year institution like GE is in sick bed.

GE's $24 billion buyback boondoggle
https://money.cnn.com/2018/03/23/inv...elt/index.html

Understood where you are coming from and get the point that not every one may be knowledgeable enough to act on it. But then should those people participate in the market at all?

That said, in India the retail segment (a portion of it at least) seems to be better informed. While I'm not invested in GAIL, looked up the subscription for retail segment - I see it was oversubscribed as well. So, it is not as if only the Govt India looted GAIL :-) , some small investors also did get a share i.e ~1Lakh individuals out of ~7Lakh retail shareholders, which only reiterates the point you made, that this form of wealth distribution may not be equitable.


And in case of GE, it would be in the same hole it dug itself in - if it had ladled out the monies as dividends isn't it? The basic issue was that it handed out money to the investors, while it would have been better off retiring its debts.

[carboy]

Originally Posted by SmartCat

Stock price increase is not "guaranteed". If there is a market correction, even a buyback stock will crash.

Unrelated external factors will affect both choices irrespective of whether it's a buyback or dividend.

Let stock price be Rs.100. Now 2 scenarios

A) company gives dividend of Rs. 4 per stock

B) company does the equivalent buyback.

Now let's say the stock market crashes around the same time. Now the stock value may crash to Rs. 80. So your value before dividend = Rs. 100 & your value post dividend is Rs. 84. But you won't blame your 16 Rs loss of value on the dividend, right? That's exactly the same case with a buyback.

[SmartCat]

Originally Posted by thirugata

What i mentioned is pure math and fact. The example you gave is hypothetical.

Am just being realistic. Statistically, companies that retain all profits do not survive for long.

Companies that pay out regular dividends have a long shelf life. This happens because management of companies that pay out dividends are much more prudent. They take less risks because they don't have extra cash sloshing around.

Take a look at companies that have become large. Out of NIFTY50 or S&P500, majority of them have decades long history of consistent dividend payments. There are others who don't, but see if such companies will still be around in NIFTY 50 after 10 years.

Originally Posted by whitewing

And in case of GE, it would be in the same hole it dug itself in - if it had ladled out the monies as dividends isn't it? The basic issue was that it handed out money to the investors, while it would have been better off retiring its debts.

Buyback route is ideal to clean out a company. These vultures buy companies when the stock price is low (say $10), influence the board/management, get them to clean out their reserves & additionally take bank loans. The CEO is paid a hefty bonus too by the Board. After that, they arrange for a buyback price of $15 and pocket the difference.

Originally Posted by carboy

Unrelated external factors will affect both choices irrespective of whether it's a buyback or dividend.

OK sure. Anyway, my main issue with buyback is that it preys on information mismatch between different classes of investors. And that it is prone to misuse.