Despite a level of global uncertainty, the overall economy continues to boom. The rising tide of corporate prosperity brings with it a bevy of benefits for investors. Higher profits mean companies have the flexibility to offer greater dividends to their shareholders. Further, cash reserves allow companies to initiate stock buyback programs. Both dividends and buybacks increase the value of a portfolio. In 2019, the market saw a flurry of stock buybacks and near-record dividends. This year is poised for even more buybacks and dividend increases, should market conditions remain stable.
International turmoil and domestic conflict aside, larger companies have benefitted from recent policy. Tax cuts and deregulation have put more money into the average corporate coffer. The Federal Reserve’s massive repo market operation over the past several months has seen billions of dollars injected on a seemingly regular basis.
As a result, many stocks are now expensive to an unwieldy level. This is beneficial to those that own the stocks, but dissuasive to potential buyers. The S&P 500’s price-to-sales ratio climbed to an all-time high in January 2020, surpassing dot-com era levels. However, with the Federal Reserve continuing to support markets, investors are comforted with the continued accommodative Fed policy.
Benefit of Dividends
Dividends are the stock market’s variant of compounding interest. Some stocks offer a dividend, a certain value of cash or stock back to shareholders. A popular investment tactic leverages this yield to purchase more stock in order to utilize as an additional income source. As such, an investor’s portfolio increases – even if the price of the stock stagnates.
Understandably, many of the most profitable dividend stocks are those of financial groups. Last year’s top performers included The Carlyle Group, Inc. (NASDAQ: CG), Apollo Global Management, Inc. (NYSE: APO) and The Blackstone Group, Inc. (NYSE: BX). Such international investment groups are likely to top the list in 2020 as well.
What is Driving Buybacks?
Stock buybacks are a relatively recent phenomenon – the process became legal once again in the early 1980s. They are a favored response to a company finding itself flush with cash. It allows the business to inflate their own value by creating demand. On the surface, this is beneficial for both the company and the shareholders.
However, it is a short-term solution. Sinking excess funds into buoying stock prices does not create actual value. Failing to invest that money in new technology or more efficient production damages future viability of the company. Most larger companies take a balanced approach that accounts for both buybacks and investing in company processes.
Further, some dividend paying stocks will also perform buybacks. Wells Fargo & Company, Inc. (NYSE: WFC), Intel Corporation (NASDAQ: INTC), and HP, Inc. (NYSE: HPQ), all performed buybacks while paying out dividends in 2019. This is the ideal situation for shareholders.
Article By: Adam Stone