NYCB Dividend Cut

Banks stocks are generally affected by interest rates and New York Community Bancorp (NYCB) is no different. NYCB has a large amount of loans tied to New York City apartments and commercial real estate. With high interest rates, New York City rent control policies, and changing demand for commercial real estate in New York City, investors are concerned about the bank's future performance. On January 31, 2024, the company announced that it would slash its quarterly dividend from 4.17 to $.05, a 70 percent cut. Investors were none too pleased as the stock dropped from $10.38 to $6.47, a 37 percent fall in one day. To see this, check out the stock price chart from finance.yahoo.com below.

Stock Repurchase Tax

The Senate recently passed the Inflation Reduction Act of 2022. Major components of the Act include spending on climate change, increased IRS spending, and measures to lower the cost of prescription drugs. In order to pass the Act, a last minute change to get the necessary votes was a 1 percent excise tax on stock repurchases. As we showed in the text, dividends and stock repurchases affect a company and investors in much the same way. The tax may push companies toward dividends, although since the new tax wouldn't take effect until 2023, analysts are expecting large repurchases to be completed by the end of 2022.

BTCS Announces Bividend

Blockchain technology company BTCS became the first Nasdaq-listed company to announce a "bividend." The company will pay each shareholder the equivalent of 5 cents in bitcoin or cash, at the discretion of the shareholder. If you are not familiar with BTCS, the company has two full-time employees, a market capitalization of about $46 million, and hasn't shown a profit for the last four years. We should note that the market capitalization was based on yesterday's closing price as the company's stock has jumped about 50 percent so far today on the announcement!    

Buyback Excise Tax Proposed

In the textbook, we discussed how buybacks have a tax advantage over dividends because it results in a lower effective tax rate for shareholders. A new law being proposed in the Senate would levy a 2 percent excise tax on all funds used for share buybacks. Although the statement released by the Senator Ron Wyden, who is proposing the buyback tax, essentially argues that buybacks are ill-advised, the evidence is not quite as clear.

GE's Stock Price Jump

If you own shares of GE, you may have noticed that the share price jumped 700 percent in one day! The reason is that GE underwent a 1-for-8 reverse stock split. As a result, the stock price increased from $12.95 to about $104. CEO Larry Culp stated that the split was undertaken to be more comparable to its peers. Typically, a reverse stock split is done after poor stock performance. However, GE's stock has increased by about 20 percent so far this year. However, as we note in the textbook and the article notes, stock spits really don't amount to much more than keeping a stock price in a familiar range.

GE's Reverse Stock Split

General Electric, with a share price of about $13 and a market capitalization of $117 billion, currently has 8.8 billion shares outstanding. Given the large number of shares outstanding, the company has proposed a 1-for-8 reverse stock split. The stated purpose of the stock split is to reduce the number of shares outstanding to be more comparable to other companies with a similar market capitalization. Of course, the reverse stock split will also increase the share price by a multiple of eight.

Buybacks Or Dividends?

The Oracle of Omaha has spoken again: Famed investor Warren Buffett, whose company, Berkshire Hathaway, which has never paid a dividend, spoke out on his preference for buybacks over dividends. Berkshire Hathaway spent $25 billion last year repurchasing its stock, or about 5 percent of its market value. His argument for buybacks is exemplified in Apple stock. Because Apple's buybacks have reduced its shares outstanding, Berkshire's ownership of Apple has grown 10 percent since Buffett first bought Apple stock back in 2016. Berkshire now owns 10 percent more of Apple's assets and future earnings than it did five years ago. This does not account for $11 billion in Apple stock that Berkshire has sold in the interim.   

2020 Dividends Hit Record

In early 2020, stories in the news were of companies lowering or eliminating dividend payments. However, these stories appear to be overblown concerning dividends. During the year, dividend payments reached a record of $503.1 billion. The economic slowdown did dramatically affect stock repurchases as buybacks in 2020 were only about $300 billion compared to the 3-year average of $700 billion. In the textbook, we discussed how repurchases allow a company more options than dividends when making payments stockholders and corporate payout actions in 2020 appear to support this argument.

Dividend Payments Resuming

A recent Wall Street Journal article highlights part of the economic recovery from the COVID-19 shutdowns. In the spring, 42 S&P 500 companies announced dividend suspensions. To date, six of these companies have announced the resumption of dividends, and several others have announced a timeline for doing so. For example, Kohl's announced that it intends to resume dividends in the first half of 2021 after a smaller revenue drop compared to the previous quarter. Likewise, General Motors expects to resume dividend payments in mid-2021.

Dividend Comeback

 Dividends took a major hit during the early part of the COVID lockdown, with numerous companies cutting or eliminating dividends. Now it appears that dividends are making a comeback. In August, 13 S&P 500 companies announced dividend increases, but only two companies announced a dividend cut. Remember, a company will generally only increase dividends if it believes that it can maintain that dividend in the future. Overall, this appears to be an indication that these companies believe the worst of the economic crisis may be over.

Misunderstood Dividends

As we have stressed in the textbook, an investor should be indifferent between dividends and capital gains. And, in a world with higher taxes on dividends than on capital gains, investors should prefer capital gains. A recent WSJ article discusses the fact that many investors prefer dividends. In fact, the British Investment Association, which represents investment managers in the UK, argued that companies should not reduce dividends. It is surprising that professional investment managers would have such a strong view on high dividends. The preference for high dividends also appears to affect corporate finance as well. One survey mentioned in the article finds that about two-thirds of CFOs admit they would forego profitable projects if undertaking these projects would result in a dividend cut.

Oracle's Credit Rating Lowered

S&P recently announced that it was lowering the rating on Oracle's debt from AA- to A+. The reason given for the downgrade was the $36 billion the company spent on stock repurchases in fiscal 2019. The buybacks have increased Oracle's debt-to-EBITDA ratio from 0 to 1.4 and debt has increased by $18 billion. During the same period, Oracle only spent $1.66 billion on R&D.

Buffett Defends Buybacks

Even though stock buybacks have come under fire in Washington, famed investor Warren Buffett says they make "nothing but sense." In fact, Buffett announced that Berkshire Hathaway would repurchase some of its stock. Although a company can distribute money to shareholders through dividends as well, Berkshire is noted for having paid only one dividend in its history, in 1967. Berkshire recently changed its buyback policy. Previously, a buyback could only occur if the repurchase price did not exceed 1.2 times the book value. Now, the company can undertake a buyback if Buffett and his partner, Charlie Munger, believe the stock is selling below its intrinsic value.

Stock Buybacks

Stock buybacks have been in the news recently as Bernie Sanders and Chuck Schumer proposed that a company should only be allowed to buy back its own stock if certain conditions were met, such as an employee wage of $15 per hour. And today, Marco Rubio announced he would propose a tax on buybacks that would be similar to the tax on dividends for investors. Of course, as these suggestions have come from politicians, they may have a misunderstanding about stock repurchases. A recent CNBC video discusses some of these misconceptions.

Spotify's Reverse IPO

Spotify went public on April 3, 2018 in a direct listing. Bypassing the traditional underwriting process, Spotify basically said that its stock could now be publicly traded. Because Spotify did a direct listing, the company raised no additional money from outside investors. And Spotify could have sold shares on the market without worrying about the underpricing that often occurs in an IPO. Now, about seven months later, Spotify just announced a $1 billion share buyback. The stock has fallen about $8 billion since it went public and the buyback is a signal of management’s confidence in the stock. More interestingly, it also means that Spotify has never raised public capital and is using the stock market only as a means to return capital to investors. As this article points out, because of the new reliance on private investors, we could possibly see a day when a company undertakes an IPO for the purpose of initiating a buyback.

Buybacks Fall

In the second quarter of 2017, S&P 500 companies repurchased $120.1 billion worth of stock, down 9.8 percent from the first quarter and a 5.8 percent decrease from the second quarter of 2016. Only 66 of the 500 companies reduced the number of shares outstanding by 4 percent, while more than 20 percent repurchased more than 4 percent of shares outstanding the the second quarter of 2016. Apple and Boeing led the way, repurchasing $7.1 billion and $2.5 billion in shares, respectively. The S&P 500 companies did set a dividend record, paying out $104 billion during the quarter, up from $100.9 billion in the first quarter.

Share Repurchases Decline

Even though companies in the S&P 500 repurchased $115.6 billion in stock during the third quarter, this actually represented a decline of 28 percent from the third quarter of 2015 and was the smallest quarterly repurchase since the first quarter of 2013. Apple led the way, repurchasing $7.2 billion of its stock, while General Electric repurchased $4.3 billion of its stock. The top sector for buybacks was IT, with $27 billion in repurchases, while the financials sector spent $25 billion on buybacks.

Microsoft Pays Shareholders

Microsoft announced that it was raising its dividend by 8 percent and would buy back an additional $40 billion in shares after the company concludes its current $7.1 billion buyback, which is left from the company's previous $40 billion buyback. The buyback amounts to about 9 percent of outstanding shares, although because of the company's ESOP, the number of outstanding shares will be reduced by less than that amount. The dividend increase means that Microsoft is allocating nearly $1 billion more toward dividends this year than last. Total dividends paid by Microsoft this year should top $12 billion.

Share Repurchases And Value Creation

A recent article on the McKinsey & Company website discusses the effect of dividends versus stock repurchases. We are happy to report that the article comes to the same conclusion as the textbook: Repurchases do not necessarily create value and are equivalent to paying a dividend of the same amount. However, the article does bring out a couple of interesting points. First, while repurchasing debt (re-leveraging the company) results in a higher EPS, this is offset from the lower company risk due to less debt. The value of the company is unchanged (M&M), and the PE ratio should fall. Second, a more important point is that the company should undertake profitable, positive NPV projects, if available, rather than repurchase stock. In other words, a stock repurchase is essentially a capital budgeting project. A company should only repurchase its stock if the NPV from the repurchase is greater than other capital budgeting projects. Of course, if the market is efficient, the NPV from a stock repurchase is zero.

Dividends Dry Up

Even though motorists are happy with lower gas prices, investors in oil and natural gas companies are feeling pinched away from the pump as $7.4 billion in dividends have dried up. For example, Anadarko Petroleum reduced its dividend by 81 percent and Kinder Morgan and Devon Energy both reduced dividends by 75 percent. Kinder Morgan was the largest dividend cut in terms of dollars ($3.44 billion), followed by ConocoPhillips ($2.42 billion). Chevron has chosen another alternative as it is reduced its capital spending and is considering increasing its debt to maintain the company's dividend. The steep decline in energy prices has also hit capital budgeting as oil and gas companies have resulted in the cancellation of more than $100 billion in new projects.