Investors looking for good dividend yielding stocks don’t typically expect much price appreciation.
That’s going to change, probably sooner than anyone expects.
Here’s why dividend paying stocks have been playing second fiddle to growth stocks, what really drives growth, and how one all-important manipulative “growth factor” is poised to be flipped over to the benefit of dividend paying companies and their stockholders.
Not All Growth Factors Are the Same
Don’t get me wrong, there’s nothing wrong with growth stocks, there’s just more to price growth than meets the eye.
Look at the cannabis industry. That kind of growth potential is completely separated from, say, the tech sector. It’s a sector contained in itself, but it’s the fastest growing industry in the country.
This type of growth potential is compounded if you invest in a private deal, like this one. It’s open to any American, and if you invest before it considers going public, you could be sitting on massive gains.
Then there’s organic growth, the kind of growth that comes from immersing your customers in an expanding ecosystem, having a moat around your business because you’re the biggest and best at what you do, and offering consumers products and services that are better than what any competitors offer.
That organic growth, typical of the FAANG companies and Microsoft, grows revenues, profits, and cash, which effectively drives stock prices higher.
Substantial stock price appreciation also comes from another growth factor, share buybacks.
While organic growth always makes sense, jacking up stock prices through buybacks is questionable, at best. At worst it’s manipulative and illegal, at least it used to be.
It’s no wonder that some “growth” companies have seen their stock prices soar. Some of them apply massive share buyback programs on top of their organic growth programs.
The Biggest Buyback Players
Over the past 10 years Facebook’s authorized more than $24 billion of buybacks, Apple’s spent a stunning $327 billion on buybacks, Google’s spent $17 billion, and Microsoft authorized $80 billion worth of buybacks over the past decade.
Tech companies aren’t the only ones buying back their shares. Almost everyone’s doing it, not to grow their businesses mind you, to grow their stock prices.
Most egregiously the airlines conducted buybacks when they could have been paying dividends to stockholders or saving for rainy days ahead, like the storm they’re facing now.
Over the past ten years Delta’s spent more than $11 billion on buybacks; United spent more than $8 billion; and American’s spent $13 billion, while over the same timeframe its cash flow was negative $8 billion.
If all the money spent on buybacks, which amounts to over $5.3 trillion in the past ten years, according to the Harvard Business Review and other sources, would have been paid out as dividends investors would have at least put some of that money into savings, some into investments, some into consumption, but all of it back into the economy.
What should be done with the trillions of dollars wasted on buybacks, paying stockholders dividends and workers more money, is about to become headline election fodder.
While paying workers more is commendable, that won’t be the first stop for money diverted away from buybacks. The bulk of it will go into paying dividends, for good reasons, including putting that money back into the economy and stoking stock price appreciation that way.
If companies can’t manipulate their share prices higher through buybacks, they’ll start paying dividends to attract stockholders. And to keep their share prices moving upwards they’ll keep raising their dividends, which will make dividend paying stocks the new hot hand to hold.
Flipping the Switch on Buybacks
Up until 1982 companies couldn’t buy back their common stock in the open market. It was deemed manipulative.
Which makes sense if you think about it. Buying back your own shares to raise the price of your company’s stock, or put a floor under your stock price, or buying back shares to eliminate outstanding stock to increase your earnings per share metrics, if there are management compensation schemes tied to a higher stock price or greater earnings per share, is manipulative.
But that’s what companies do.
Under the Securities and Exchange Act, it’s still unlawful “to effect, alone or with 1 or more other persons, a series of transactions in any security, creating actual or apparent active trading in such security, or raising or depressing the price of such security, for the purpose of inducing the purchase or sale of such security by others.”
The thing with the SEC is, even if a rule makes something illegal, there can be another rule that makes it okay under some circumstances.
In 1982 the SEC adopted Rule 10b-18, which says an “issuer will not be deemed to have violated Sections 9(a)(2) and 10(b) of the Exchange Act, and Rule 10b-5 under the Exchange Act (the rules that say you can’t manipulate your stock by buying it back) “solely by reason of the manner, timing, price, or volume of its repurchases, if the issuer repurchases its common stock in the market in accordance with the safe harbor conditions.”
The rule that make what’s illegal legal, namely Rule 10b-18’s safe harbor provision, makes it legal to conduct manipulative buybacks if the buybacks are designed in such a way to “minimize the market impact of the issuer’s repurchases.”
The safe harbor says, “securities laws will not be considered to have been violated solely by reason of the manner, timing, price, or volume of such repurchases, provided that the repurchases are made within the limitations of the Rule.”
In other words, go ahead and manipulate as long as you’re mindful to “use a single broker or dealer per day to bid for or purchase common stock…to avoid the appearance of widespread trading.”
Go ahead and manipulate, just don’t buy your shares at the open or at the close, “because market activity at such times is considered to be a significant indicator of the direction of trading, the strength of demand, and the current market value of the security.”
Go ahead and buyback your shares as long as the price you pay “is no higher than the highest independent published bid or last independent transaction price.”
And go ahead and manipulate your stock price higher just be mindful of the volume of shares you buy on any day so you’re not “dominating the market” and misleading other investors.
Seriously, companies, directed by management whose purposes are almost always self-serving, can end-around the whole buybacks are manipulative and illegal rules by simply following newer rules on when and how-to buyback their shares.
Supporters of repurchase programs point to their non-manipulative uses, such as signaling confidence, offsetting stock dilution, and returning unproductive capital to shareholders, to justify Rule 10b-18.
Really? Companies would signal more confidence by paying regular dividends and regularly increasing them than buying back shares. They’d have to be more honest about the dilutive effects of options compensation if they didn’t have a way to hide what they’re paying executives. And returning “unproductive capital” to shareholders in the form of dividends that circulate through the economy is the anthesis of unproductive and wasteful.
Change is Already in the Wind
The SEC’s been getting a lot of petitions to “revise Rule 10b-18 to curb manipulative practices by firms and encourage corporations to fairly compensate American worker(s),” as one petition last June put it.
For sure, Democrats are going to want to kill the safe harbor along with President Trump’s tax cuts, which provided significant benefits to corporations, which they used to buy back shares.
In 2018, the first full year after the tax cut, stock buybacks surged 64% over the previous year, topping $1 trillion in a year for the first time ever.
Talk about egregious. Think about how much of that money went down the drain in the market selloff that just rocked Wall Street and Main Street.
Imagine if just that one year’s $1 trillion went back into the hands of investors, went back into the economy? Imagine if some of that money went to workers’ wages, or their pensions?
The political winds are stirring on this issue. We’re going to hear all about it from democrats sooner than you know.
But you heard it first here.
Next up, I’ll tell you which stocks are going to be worth buying for their dividend yields and their potential appreciation.
Until then,
Shah
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Source: Total Wealth Research