The Wall Street Journal took aim yesterday at stock repurchases and dividend payments, citing a commissioned study that concluded:
“companies in the S&P 500 index sharply increased their spending on dividends and buybacks to a median 36% of operating cash flow in 2013, from 18% in 2003. Over that same decade, those companies cut spending on plants and equipment to 29% of operating cash flow, from 33% in 2003.”
The article raises concerns about the implications of this trend for the U.S. economy and targets stockholder activists for pressuring companies to return more money back to stockholders.
There are, of course, valid reasons for returning cash to stockholders. For example, it can be more tax efficient than a cash dividend. For some companies, the prospect of routine dividends may be the value proposition offered to investors.
Nonetheless, stock buybacks can be viewed as fundamentally antagonistic to the raison d’etre for the corporation. Investors give money to corporations because they expect the corporation to put their funds to better use than they can on their own. When a corporation gives the money back through a stock buy-back or cash dividend, the implicit message to investors seems to be “we can’t think of anything better to do with your money”.