Stock Buybacks Plus Dividends Equaled Subpar Returns in Post-Crisis Period

The cash hoarding that many companies have engaged in since the financial crisis began hasn't had the effect that investors and CEOs might have hoped. New research from Standard & Poor's shows that companies using both dividends and stock buybacks as major strategies to deal with extra cash on their balance sheets haven't fared well over the last three years. S&P 500 companies using either one of those strategies between June 2007 and June 2010 saw their stocks lose an average of more than 10% in value, while companies using both strategies lost an average of more than 21%.

S&P Equity Research reported that 353 of the S&P 500 (71% of the total) used their excess cash to provide dividend payments and pay for stock buybacks during that period, while another 95 (19%) only repurchased stock, and 39 (8%) made cash dividend payments only. Just 13 of the S&P 500 companies used neither strategy during that time.

A Losing Combination

"Companies that paid only a dividend generated an average unweighted total return of minus 12.7%, slightly worse than the minus 10.5% return for the buyback-only group, but considerably better than the dividend and buyback group return of minus 21.3%," the S&P report said.

Todd Rosenbluth, an S&P equity analyst and co-author of the report, says that when it came to generating total returns, companies that focused either on stock buybacks or on dividends weathered the recession's harsh economic environment much better those that used both strategies. Rosenbluth says companies that used cash for buybacks "probably added a floor for their stock [price] or created some support" and that those adding dividends made their stocks more attractive to investors searching for higher yield in a declining market.

However, when firms combined the two strategies, investors seemed to lose confidence. "This may reflect skepticism about adequate growth prospects and/or resources for companies committing capital to dividends and buybacks."

A Coming Pickup in Capital Spending?

Even though the strategies didn't seem to help returns much, S&P said investors can expect to see companies continue boosting dividends and using stock buybacks next year because companies still have huge sums of cash their balance sheets. Although companies could use it for other things, like making acquisitions, paying down debt or increasing capital spending, companies that have traditionally paid dividends will continue to do so, and companies that haven't decided on a major growth strategy will likely keep buying back shares as a short-term way to increase earnings per share.

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"What we're seeing is now that the recession has ended, companies are feeling more comfortable using their cash," says S&P equity analyst Stewart Glickman, who co-authored the report. "Some of what we saw build up in 2009 and early 2010 is now being put to use."

Glickman highlights the industrial sector as having amassed more money than any other, projecting that in 2011, "one of the things you may see [in that sector] is a pickup in capital spending as well as a pickup in dividend payments."

He also predicts that the energy sector, which is also flush with cash, would continue to spend huge sums on investment spending next year if the economy keeps improving.

The S&P analysts emphasize that the results of each strategy could vary significantly among companies and throughout industry sectors. They also point out that the fortunes of some could turn around quickly: Many companies that showed losses during the period covered by the report have since recovered some of their stock value in the rally that led up to the midterm elections.