r/securityanalysis
Return the Dividend
The author argues Adobe and PayPal would see stock price benefits and higher fair value if they switched from buybacks to dividends.
- Switching from buybacks to dividends lowers asset duration and risk.
- Lower risk and duration should raise the fair value and benefit stock prices.
I believe that there's a compelling case to be made that if companies like Adobe or Paypal were to switch to dividends, away from buybacks, their stock prices would benefit.
This has to do with the terminal nature of buybacks. Making the switch to dividends lowers the duration of the asset, lowers risk, which should raise the fair value of the asset.
Curious what you guys think.
That may be true. Much more expensive to short. That being said, the management and the board are confident in the future of the business, buyback are FAR more accretive. Then in five years after buying back 50% of the shares outstanding you can pay a dividend.
Very true! Absolutely agree that the true risk could be way overstated based on perception.
That said, I think id be way more inclined to own Adobe (for instance) if I 'knew' that I'd get 50% of my money back in the next 5 years vs hoping the business still looks resilient heading into years 6 through 10.
From the enterprise perspective - I’m sure they’d prefer their shareholders be the long term holders that look to minimize tax expense.
From the individual investor perspective - I agree, I’d appreciate if my holdings would return concrete value every quarter.