Booking open Available Pune Call Girls Shivane 6297143586 Call Hot Indian Gi...
ย
Q&A-Dividends vs. Share Buybacks
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, theyโre 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 theyโve got too much cash on the balance
buybacks arenโt the deal theyโre cracked up to be. sheet and itโs depressing their return on equity [a
measure of profitability]. So they donโt 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 theyโre 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 donโt
Fund (symbol DVFAX), launched in August 2005. really think so. When you think about it, management
Previously, he managed Washington Mutualโs $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, whoโs based in Seattle, during a visit to Cohen went from a low-growth company to a high-growth
& Steerโs midtown Manhattan offices. The conversa- company on ROE and you didnโt do one thing to
tion revolved around the relative merits of dividends increase your business. I think the market misses this.
versus share buybacks. Itโs not that itโs bad in every situation. Itโs that the
market as a blanket rule thinks itโs positive and it isnโt
KIPLINGERโS: 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 youโre 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- theyโre 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. treadmill where youโre buying back shares on the one Do you think the S&P 500โs dividend yield will
hand and issuing them with the other hand, and ever return to its historical norm [about 4.5% vs.
youโre 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 itโs 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 thatโs why theyโre 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 โ 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 itโs not you look at, theyโre 40% to 45% of your return. But if
extended, I think it will probably be the same youโre 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, youโre talking about half
dend payers and then back to normal. your return.
Reprinted with permission from the May 3, 2006 Kiplinger.com.
ยฉ 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 cohenandsteers.com. 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.