Thursday, January 30, 2014

Why I love my dividends more than share buyback?

Readers of my blog would know that I love dividends from my investments as they provide a good cashflow turnaround for my daily life's activities.

I love companies that return good shareholders' value in the form of dividends. To me, distributing out dividends to investors is something that is  tangible and should be the number one priority for every companies especially if they are having a stellar year in profits. However, some companies may choose to use their earnings to repurchase their outstanding shares from the open market instead.

Let's use a company that I own - Sembcorp Industries - to make the case.

For years, the company does not have a fixed dividend distribution policy to investors. But it has a payout ranging from 30% to 45% in recent years. The reason for the lower dividend payout to investors is because the company is often engaged in their daily share buyback of their shares in the open market. Through a share buyback, the number of outstanding shares is reduced (Sembcorp has outstanding shares of 1,783,837,879 as of 23 Jan 2014 versus 1,785,604,129 as of 30 Sep 2013). This reduction of the float means that even if profits were to remain the same, earnings per share would increase. 

I do not quite understand the reason they would so often does this share buyback because what they are doing is generally dollar-cost averaging. If the price is undervalued and is trading below the intrinsic value, then it makes sense to do the buyback. But if they are simply doing this every other day, it seems the earnings could be better returned to shareholders in the terms of dividends. Perhaps, this is why we often see the stock price has lesser volatility than the other stocks in general. Maybe the buyback is supporting the price.

Sembcorp is scheduled to announce their FY results on 26 Feb 2014 shortly. Based on the EPS for the 9M, it seems like investors are poised to receive a higher dividends this coming year. Assuming a similar payout %, I foresee a 16.5 cents/share distributed out in the forms of dividends. That represents about 10% increase from last year. Not so bad you would thought. But I still prefer cash dividends ;)


  1. Next AGM, you can ask CEO to explain why?


    1. Hi Uncle

      I did ask before during the agm, but no concrete answer though.

      Being a long investor of sembcorp, do you hv any idea why they are doing this?

  2. They simply said that they are using the retained earnings to prepare for working capital and capex which is needed in their industries growth. I wonder how much is that accounted for in the share buyback. They do hv a lot of treasury and restricted shares in their sop plan though so to ensure outstanding shares do not keep increasing they will hv to do share buyback.

  3. Is CEO trying to mitigate the stock price downside by reducing the supply (public float)?

    or accumulate treasury stocks and then reward royal shareholders with bonus issues few years down the road?

    1. I doubt they will do that.

      They probably do that to reward their management staff share options bonus as a part of their compensation rewards.

  4. buy backs = higher eps = higher div in the future.

    The way i see dividends vs buy backs: cash now vs. higher cash in future.

    It should in theory have the same effect...

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