Dividend Investing

Thrugelmir

AsifM068 said:

NedS said:

There are only so many things a company can do with it's cash when it makes a profit. It can reinvest that cash for future growth, and that in itself can take many forms - investing in automation, efficiency, people, training, advertising, buying out the opposition etc. Or it can reduce debt, or buy back it's own shares, returning value to shareholders as the proportion of the company you hold increases, or it can pay out cash to share holders by way of dividends (or a combination thereof). Depending on the company, hopefully the management will make choices suitable for that company that give the best overall return.

For my understanding please; a company sells shares to raise equity, so why would a company buy them back and following a buyback and I have less shares, how have I benefitted?

Every £ of future profit is allocated/distributed between a fewer number of shares. 

Say a 100 shares are issued. Company makes a £100 profit. That's £1 per share.

With 50 shares bought back. That £100 of profit is now apportioned at £2 per share.

That's a simplistic explanation I should add. 

US companies in particular issue swathes of shares in the form of remuneration packages for management and employees alike. US companies also book the cost of the share issuance directly to the balance sheet rather the profit and loss account. Which makes the true cost to other shareholders disguised. Companies are adept at financial engineering in their accounts to present financial results in the best possible light. Beneath the surface of collective funds investing can become murky. Hence why even mainstream indexes use a variety of filters to adjust market weightings atttributable to individual shares.  

AsifM068

Thrugelmir said:

AsifM068 said:

NedS said:

There are only so many things a company can do with it's cash when it makes a profit. It can reinvest that cash for future growth, and that in itself can take many forms - investing in automation, efficiency, people, training, advertising, buying out the opposition etc. Or it can reduce debt, or buy back it's own shares, returning value to shareholders as the proportion of the company you hold increases, or it can pay out cash to share holders by way of dividends (or a combination thereof). Depending on the company, hopefully the management will make choices suitable for that company that give the best overall return.

For my understanding please; a company sells shares to raise equity, so why would a company buy them back and following a buyback and I have less shares, how have I benefitted?

Every £ of future profit is allocated/distributed between a fewer number of shares. 

Say a 100 shares are issued. Company makes a £100 profit. That's £1 per share.

With 50 shares bought back. That £100 of profit is now apportioned at £2 per share.

That's a simplistic explanation I should add. 

US companies in particular issue swathes of shares in the form of remuneration packages for management and employees alike. US companies also book the cost of the share issuance directly to the balance sheet rather the profit and loss account. Which makes the true cost to other shareholders disguised. Companies are adept at financial engineering in their accounts to present financial results in the best possible light. Beneath the surface of collective funds investing can become murky. Hence why even mainstream indexes use a variety of filters to adjust market weightings atttributable to individual shares.  

Thank you Mr T👍clearer now🙂

tebbins

Thrugelmir said:

AsifM068 said:

NedS said:

There are only so many things a company can do with it's cash when it makes a profit. It can reinvest that cash for future growth, and that in itself can take many forms - investing in automation, efficiency, people, training, advertising, buying out the opposition etc. Or it can reduce debt, or buy back it's own shares, returning value to shareholders as the proportion of the company you hold increases, or it can pay out cash to share holders by way of dividends (or a combination thereof). Depending on the company, hopefully the management will make choices suitable for that company that give the best overall return.

For my understanding please; a company sells shares to raise equity, so why would a company buy them back and following a buyback and I have less shares, how have I benefitted?

Every £ of future profit is allocated/distributed between a fewer number of shares. 

Say a 100 shares are issued. Company makes a £100 profit. That's £1 per share.

With 50 shares bought back. That £100 of profit is now apportioned at £2 per share.

That's a simplistic explanation I should add. 

US companies in particular issue swathes of shares in the form of remuneration packages for management and employees alike. US companies also book the cost of the share issuance directly to the balance sheet rather the profit and loss account. Which makes the true cost to other shareholders disguised. Companies are adept at financial engineering in their accounts to present financial results in the best possible light. Beneath the surface of collective funds investing can become murky. Hence why even mainstream indexes use a variety of filters to adjust market weightings atttributable to individual shares.  

They also issue nearly a $ trillion a year in buybacks, overtaking dividends as the main form of payout, but really all they're doing is circumventing GAAP rules to make "screwing the customer and the owner to pay themselves a bonus" look like it isn't an expense when it - ahem... VERY OBVIOUSLY IS.
I hope they get the message.

Thrugelmir

tebbins said:

Thrugelmir said:

AsifM068 said:

NedS said:

There are only so many things a company can do with it's cash when it makes a profit. It can reinvest that cash for future growth, and that in itself can take many forms - investing in automation, efficiency, people, training, advertising, buying out the opposition etc. Or it can reduce debt, or buy back it's own shares, returning value to shareholders as the proportion of the company you hold increases, or it can pay out cash to share holders by way of dividends (or a combination thereof). Depending on the company, hopefully the management will make choices suitable for that company that give the best overall return.

For my understanding please; a company sells shares to raise equity, so why would a company buy them back and following a buyback and I have less shares, how have I benefitted?

Every £ of future profit is allocated/distributed between a fewer number of shares. 

Say a 100 shares are issued. Company makes a £100 profit. That's £1 per share.

With 50 shares bought back. That £100 of profit is now apportioned at £2 per share.

That's a simplistic explanation I should add. 

US companies in particular issue swathes of shares in the form of remuneration packages for management and employees alike. US companies also book the cost of the share issuance directly to the balance sheet rather the profit and loss account. Which makes the true cost to other shareholders disguised. Companies are adept at financial engineering in their accounts to present financial results in the best possible light. Beneath the surface of collective funds investing can become murky. Hence why even mainstream indexes use a variety of filters to adjust market weightings atttributable to individual shares.  

They also issue nearly a $ trillion a year in buybacks, overtaking dividends as the main form of payout, but really all they're doing is circumventing GAAP rules to make "screwing the customer and the owner to pay themselves a bonus" look like it isn't an expense when it - ahem... VERY OBVIOUSLY IS.
I hope they get the message.

Meanwhile corporate USA becomes more and more indebted. As the buybacks aren't always funded from free cash flow but borrowed funds. 

AsifM068

Why are value stocks correlated to high dividends and short term gains please?

tebbins

AsifM068 said:

Why are value stocks correlated to high dividends and short term gains please?

They aren't necessarily. However higher dividend yields tend to be associated with companies with lower valuations, though it depends what measures you use - earnings yield, dividend yield, cyclically adjusted earnings yield, net equity per share - and whether you're talking about the lower valued half, lowest valued third/quarter etc of the market. Over the past 10 years value and yield have behaved more similarly than as compared with the wider global market and other factors. One key difference is that a company may be lower valued, or considered "value" because it's having trouble (new anti-tobacco laws, a fire in a factory, their systems got hacked, management fraud, cyclical or higher risk industry like commodities or construction) which may correspond with cutting or cancelling dividend payments - whereas stocks with higher dividend yields may simply be expected to see share price growth slower than the market average hence needing an extra few % of yield to make up for it. I.e. if the global market's dividend yield is 2%, and expected share price growth is 5%, then if the high yield index is yielding 4%, the market is implicitly expecting only 3% share price growth from those companies.
Value stocks can have higher volatility than growth because growth are seen as higher quality - recurring revenues, strong credit rating, easily predictable (see Fundsmith's holdings for example). With value stocks, you're sometimes waiting for the situation that made it a value stock to end - the MSCI UK value index is overweight on financials and oil & gas, because of COVID, climate change, depleting oil and low interest rates these types of companies are considered to be in trouble, if circumstances change e.g. COVID subsides, governments pay them grants to go green, interest rates rise etc., their share prices are likely to respond more than companies shielded from these events.

https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FAWFLF&IsManual=false&_ga=2.47295328.610354120.1638700845-1507196786.1627920905

Thrugelmir

AsifM068 said:

Why are value stocks correlated to high dividends and short term gains please?

There's more to value investing than purely yield. That's where many retail investors get it wrong. When there's a high yield on offer you need to dig further and research in depth. Plenty of companies are value traps. Where future dividends could fall. 
When companies generate cash they have 3 options. Reinvest back into the business to grow organically or improve internal productivity , buy another company or return the cash to shareholders. Reading the published accounts is a good place to start. Understand the company's plans and objectives. 

AsifM068

Thrugelmir said:

AsifM068 said:

Why are value stocks correlated to high dividends and short term gains please?

There's more to value investing than purely yield. That's where many retail investors get it wrong. When there's a high yield on offer you need to dig further and research in depth. Plenty of companies are value traps. Where future dividends could fall. 
When companies generate cash they have 3 options. Reinvest back into the business to grow organically or improve internal productivity , buy another company or return the cash to shareholders. Reading the published accounts is a good place to start. Understand the company's plans and objectives. 

Many thanks Mr T🙂

AsifM068

tebbins said:

AsifM068 said:

Why are value stocks correlated to high dividends and short term gains please?

They aren't necessarily. However higher dividend yields tend to be associated with companies with lower valuations, though it depends what measures you use - earnings yield, dividend yield, cyclically adjusted earnings yield, net equity per share - and whether you're talking about the lower valued half, lowest valued third/quarter etc of the market. Over the past 10 years value and yield have behaved more similarly than as compared with the wider global market and other factors. One key difference is that a company may be lower valued, or considered "value" because it's having trouble (new anti-tobacco laws, a fire in a factory, their systems got hacked, management fraud, cyclical or higher risk industry like commodities or construction) which may correspond with cutting or cancelling dividend payments - whereas stocks with higher dividend yields may simply be expected to see share price growth slower than the market average hence needing an extra few % of yield to make up for it. I.e. if the global market's dividend yield is 2%, and expected share price growth is 5%, then if the high yield index is yielding 4%, the market is implicitly expecting only 3% share price growth from those companies.
Value stocks can have higher volatility than growth because growth are seen as higher quality - recurring revenues, strong credit rating, easily predictable (see Fundsmith's holdings for example). With value stocks, you're sometimes waiting for the situation that made it a value stock to end - the MSCI UK value index is overweight on financials and oil & gas, because of COVID, climate change, depleting oil and low interest rates these types of companies are considered to be in trouble, if circumstances change e.g. COVID subsides, governments pay them grants to go green, interest rates rise etc., their share prices are likely to respond more than companies shielded from these events.

https://research.ftserussell.com/Analytics/Factsheets/Home/DownloadSingleIssue?issueName=FAWFLF&IsManual=false&_ga=2.47295328.610354120.1638700845-1507196786.1627920905

Thank you for this.🙂

AsifM068

They / Mr YouTube says that the next decade will herald a period for value stocks investing in contrast to growth for the markets are way to overvalued at present and not much more head height left which I understand. Thank you again for I learn a little more each week.