May 3, 2006
                             Trusted Financial Advice and Business Forecasts for More Than 80 Years

Five Q...
treadmill where you’re buying back shares on the one       Do you think the S&P 500’s dividend yield will
hand and issuing...
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Q&A-Dividends vs. Share Buybacks


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Q&A-Dividends vs. Share Buybacks

  1. 1. May 3, 2006 Trusted Financial Advice and Business Forecasts for More Than 80 Years Five Questions for Richard Helm By David Landis leverage up the balance sheet. In fact, they’re deploy- ing money into their own stock not because they The manager of Cohen & Steers Dividend Value Fund have faith their stock is undervalued, but more likely discusses dividend stocks and why he thinks share because they’ve got too much cash on the balance buybacks aren’t the deal they’re cracked up to be. sheet and it’s depressing their return on equity [a measure of profitability]. So they don’t grow the New York-based Cohen & Steers has long been business, they artificially inflate earnings at best, and known as a money-management firm specializing in they’re lowering their net income potentially by tak- real estate stocks. In the past several years it has ing the cash that could have earned some rate of been branching into other types of income-produc- interest off the balance sheet. ing securities, including preferred stocks and divi- dend-paying stocks of utilities and other kinds of But investors almost uniformly view share buy- companies. back announcements as a positive move. It increas- es your share turnover, but it reduces your float Richard Helm runs Cohen & Steers Dividend Value [shares outstanding]. So is that a positive? I don’t Fund (symbol DVFAX), launched in August 2005. really think so. When you think about it, management Previously, he managed Washington Mutual’s $2.3- is compensated largely on measures such as share billion WM Equity Income fund. As he did with the price and return on equity. It makes sense to get that WM fund, Helm is focusing at his new fund on com- cash off the balance sheet because then when I take panies that are increasing their dividends by at least my net income and divide it by equity, if my equity is twice the rate of inflation. We recently chatted with lower, my return on equity goes up. You suddenly Helm, who’s based in Seattle, during a visit to Cohen went from a low-growth company to a high-growth & Steer’s midtown Manhattan offices. The conversa- company on ROE and you didn’t do one thing to tion revolved around the relative merits of dividends increase your business. I think the market misses this. versus share buybacks. It’s not that it’s bad in every situation. It’s that the market as a blanket rule thinks it’s positive and it isn’t KIPLINGER’S: Many analysts and portfolio man- always positive. agers say they like to see companies return cash to shareholders in the form of dividends or share How do management stock options fit into the buybacks. But you’re not a big fan of share buy- picture? There are studies that show most compa- backs. Why not? nies that buy back shares actually issue more shares than they buy back. So when you think about that, all HELM: I am adamant that in most cases share buy- they’re doing is spending cash on the balance sheet backs do not make economic sense. When a compa- in order to effectively stem the dilution they would ny buys back shares, they take cash off the balance have from handing out all these management sheet, so they weaken their balance sheet. Worse yet, options. Now I think you have to attract and retain they borrow money to buy back shares, so they good management. But you are just getting on this
  2. 2. treadmill where you’re buying back shares on the one Do you think the S&P 500’s dividend yield will hand and issuing them with the other hand, and ever return to its historical norm [about 4.5% vs. you’re spending cash that is just not benefiting any- 1.8% now]? Cash on the balance sheet was $2.3 tril- body except management, which owns all those lion in December, an all-time high level. Think about options. So it’s really a transfer of cash from the bal- that in terms of depressing your return on equity. ance sheet to management. Management wants that cash off of their balance sheets, and that’s why they’re announcing these huge repurchases. Payout ratios [dividends as a percentage Congress lowered the tax rate on most stock of earnings] are at all-time lows — 30%. The histori- dividends to 15% in 2003, and that expires in cal average is 51%. I think that will bottom and start 2008. What will happen if Congress fails to extend the lower rate? I fully anticipate at this to come back up as more and more people, more and point that it will be extended. Even if it is not, more shareholders, more and more institutional man- remember that in 2003 when it actually passed, agers start demanding dividends. In a low-return envi- there was about a two- or three-day pop in divi- ronment, dividends become a larger and larger part of dend paying stocks. Then that was it. They just the total return. Historically, depending on the period kind of trended back to the norm. If it’s not you look at, they’re 40% to 45% of your return. But if extended, I think it will probably be the same you’re talking about a 3% yield on a market that may thing: a short-term sell-off in some of these divi- only produce 6% a year, you’re talking about half dend payers and then back to normal. your return. Reprinted with permission from the May 3, 2006 © 2006 The Kiplinger Washington Editors Inc. All rights reserved. Please consider the investment objectives, risks, charges and expenses of the fund carefully before investing. A prospectus containing this and other information may be obtained by calling 1-800-330-7348 or visiting our website at Please read the prospectus carefully before investing. The views and opinions herein are as of the date of publication and are subject to change. This material represents an assessment of the market environment at a specific point in time, should not be relied upon as investment advice and is not intended to predict or depict performance of any investment. There are special risks associated with investing in the Cohen & Steers Dividend Value Fund including the loss of the entire amount you invest. The value of common stocks and other equity securities will fluctuate in response to developments concerning the company, political and regulatory circumstances, the stock market, and the economy. As a non-diversified investment company, the fund may invest in fewer individual companies than a diversified investment company, which may increase the risk of large price fluctuations. Cohen & Steers Securities, LLC, distributor. Reprinted with permission of Kiplinger.