Capital return debates
Last year, U.S.-listed firms returned over $1 trillion to their shareholders in the form of dividends and buybacks. Was this an appropriate amount? Did firms execute capital return programs in the most efficient manner?
Advising management teams and boards on these decisions on a daily basis, we continue to see a wide dispersion of approaches. Some feel capital returns shortchange future growth by limiting capex and R&D. Conversely, others staunchly believe that firms can over-invest, not earn their cost of capital, and should therefore return more capital to their shareholders.
Even when boards are in agreement about how much capital should be returned, there is often significant disagreement about how it should be returned. Some have the view that buybacks wrongly reward investors who are selling and leaving the firm. In addition, they say, firms are terrible at timing the market and often buy when shares are at, or close to, their peak. Others argue that buybacks are superior to dividends because they are more tax efficient to most investors, generate EPS accretion, and are inherently easier to modulate than dividends.
To incorporate the views of an important constituency, the public shareholders, we queried representatives of more than three dozen of the largest asset managers, who collectively manage over $5 trillion of assets. We solicited their views on a dozen key issues related to capital allocation. Even among asset managers, there is a wide range of opinions on capital allocation. While firm-specific situations could refine viewpoints, there are fundamental themes to keep in mind.
- A balanced capital return program that includes both dividends and buybacks is likely appropriate for a majority of firms
- Most investors assert that organic EPS growth is worth more than repurchase-driven accretion
- A majority of investors believe that the buyback decision should be influenced by management’s perspective on value
- Investors view token dividends and special dividends as generally less valuable
- Investors generally believe in a “dividend premium,” i.e. a growth adjusted valuation premium for firms paying out strong dividends
- Many investors believe firms wait too long to cut their dividends when cash flow is constrained