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. 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 Kiplinger.com.
© 2006 The Kiplinger Washington Editors Inc. All rights reserved.
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Reprinted with permission of Kiplinger.