The Alpha IR team has spent the last few weeks in a great debate around dividend policy and the role of special or one-time dividends in our clients’ investment theses. The topic became such a hot button for a few of our clients and prospects that we decided it was time to pick up the phones and pick the brains of the audience that matters – the buy-side. A handful of clients that were seriously investigating this topic already received this feedback 10 days ago, but we thought we’d share the broader dividend comments with friends of the firm.
In total, our team spoke with almost twenty different investors of various sizes, shapes and investment disciplines. We were not surprised by the lack of perceived value we heard from the Street around one-time dividends. However, the feedback we received about the value of regular quarterly dividends and their muted impact on the general buy/sell decision making process were quite interesting. We offer our perspective of this feedback after the inserted quotes below.
Buy-Side’s Perspective on One-Timers
- “I don’t really like the one-time dividends. It seems like they benefit management and shareholders with a short-term time frame a lot more than they benefit us as long-term shareholders. I would
rather see a company increase the quarterly dividend rate or buy back stock before they do a one-time dividend. Those activities send a message to investors that the management team is very confident in their future and they expect earnings are going to rise to support that dividend payment. I think investors get that and ascribe a higher value to companies who are raising their dividends. So when it
comes to the one-time dividends, it just seems like a way to get around taxes and does not really signal anything about your future prospects or why I should own the stock.” ~ Major Income Investor
- “Special dividends really make me question the management team of the companies that are rushing these announcements into the market today. All they are accomplishing is getting a short-term run-up
in the stock price and creating volatility in their stock. I’d rather see the cash stay on the balance sheet and either raise the regular dividend or reinvest in the company. There just is not much value in a
special dividend. Ultimately, it comes down to tax avoidance, not capital appreciation. I am interested in companies who are taking a longer, more holistic view of how to best grow their company. The best
managers are the innovators, not the ones who look for ways to save a few dollars on their taxes.” ~ Large Value Portfolio Manager
- “Personally, I’d rather see a company invest in their business and create value that can add to results in 12 months over a one-time dividend. If the choice is between letting cash sit on the balance sheet
or give it back to shareholders, I think it is 100% give it back to shareholders. But unless a dividend is regular, investors won’t pay for it in terms of valuation. One-timers get you a pat on the back, but are
forgotten the day after the check is cashed.” ~ Small Hedge Fund
Buy-Side’s Perspective on Quarterly Dividends
- “I meet with the leaders of Industrial companies every week and I can tell you that I’ve had a number of them stress about my opinion of them possibly raising their dividend from 1% to something higher.
I kind of find the conversation funny and always tell them that I’m not looking to make a few pennies on your stock through dividends. I’m in the stock for the long-haul and I expect your dividend to be a
very small part of my total return. What I care about is that your team makes smart, sound capital allocation decisions. For me, dividends really are a component of that story, not for their cash impact,
but for the message they send to me as an investor around priorities for that particular management team. So my advice for most of the companies I watch would be to keep your dividends small and
increasing, but use them as a key part of your capital allocation strategy and make sure that strategy is articulated to shareholders.” ~ $4-5B Value Investor
- “Whether a stock is yielding 1.5% or 2.5% doesn’t make a whole lot of difference for us. We believe the bulk of our gains are going to come from the appreciation we get in the equity price, not the yield.
So again, we don’t place much value on dividends below 2% when we are looking to invest in a company. We look for predictable, visible, earnings growth. After that, we consider valuation as well as
the likelihood of a company outperforming its peer group and other relevant benchmarks. So while some yield is beneficial from a capital preservation standpoint, it has never made the difference for us
when we were evaluating a stock to buy or to keep.” ~ High Quality, Large Growth Investor
- “If a company had a dividend yield of above 3-4%, then it would definitely attract a different sort of
investor. But overall, I view dividends as being an effectively neutral event. They don’t really change my perception of a company at all. The only real benefit is that it makes the balance sheet more
efficient and may attract a certain type of investor due to that.” ~ $50B+ GARP Investor
- “We don’t place much importance on dividends at all. In fact, I would say our investment decisions really aren’t impacted by a stock’s dividend history, current dividend policy or yield. This is really a
question about a company’s cash usage strategy, and honestly we are indifferent as long as the ROI is above average. If the company has good management and can execute on their strategy, they will be
successful whether they are deploying that cash via mergers and acquisitions, capital expenditures, buying back shares, or a dividend. The market values competent management above all and that’s
what we seek to identify and invest in.” ~ Major Hedge Fund
- “I don’t think going from a 1-2% regular dividend to a 3% plus yield attracts a different investor set for any company. You really need to get to around 4 or 5% to get people to take another look and to
attract more traditional income investors.” ~ Small Hedge Fund
Overall, we found this feedback very interesting and we hope you did as well. As it relates to one-time dividends, Alpha IR generally agrees with the investor comments above, however we will note a few
exceptions. There are many companies out there with significant cash positions, fighting secular challenges and/or an unattractive M&A environment. Ditto highly cyclical businesses like the refining industry, which has certainly used special dividends effectively over the last year and is getting rewarded for them as they have done them fairly repetitively. For many of these special situation stocks you can make a clear case that a onetime dividend today makes some sense.
But outside of these unique situations, we just don’t see the value in special dividends. Investors have short memories and one-time dividends have no long lasting value the day after. They offer little in the way of strategic insight or management’s long-term view of the business and they actually distort a lot of the financial metrics that Wall Street uses to value and screen stocks. Bottom line, they are not value creating, they are value destroying across the majority of the investable world in our opinion.
In contrast, we found the feedback we received around overall dividend yields fairly enlightening. We’ve worked with numerous companies over the years that have committed to dividends well below the 3-4%
threshold that investors consistently referenced in our conversations. We’ve considered these payouts to be value-adding and a key component of the investment platform that we’ve helped our clients build. So the distinction that we took from this work was that small dividend yields might not be a key decision variable for an institutional investor when they first invest in a company, but we still believe that they do add value
through the holding period. These small dividend yields act as more of a signal to investors that the management team has the interest of investors in mind, but is also committed to investing capital towards the strategy they have laid out. Further, if management is able to make small increases to the dividend over time, this provides verification that their strategies have been effective, and that management is confident in the
firm’s ability to execute going forward. An effective capital allocation strategy allows management to put forth proof points via the dividend and ultimately elevates their reputation as “stewards of capital.” Dividends are just one part of the story, but they remain a strong long-term credibility building tool.
To sum up, American companies are sitting on record levels of cash today, and most are rapidly approaching a very critical IR communications time period – the fourth quarter earnings call. It’s a time when we help our clients take a step back, and talk more about the long-term vision of the company and less about last quarter’s tax rate and sell-side modeling questions. Thus it’s the time to talk about your capital allocation expectations and for a number of companies that will include a discussion around their future dividend strategy, not their past.
About Alpha IR Group:
Alpha IR Group is a full-service investor relations consulting firm that partners with companies to deliver best-in-class investor relations, from strategic insights to daily, tactical execution. Alpha IR offers a range of tailored programs, as well as sophisticated insights and significant experience with activist preparedness, investor day preparation and execution, earnings support, M&A/transaction support, perception studies, and more. The firm’s leaders have over 100 years of combined sell-side, buy-side, investment banking, and IR consulting experience. The firm has offices in Chicago, New York, and Boston. Alpha’s growing staff supports a client base that spans seven industry verticals and represents nearly $100 billion of equity value trading on public exchanges in North America.