December 14, 2012 | Blog
What Does the Buy-Side Think About One-Time Dividends and Dividends in General?
My team and I have 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.”