Dividend? Buyback? Let's Do Both!

Nothing says "we're going to be around for years" like offering a dividend. If a company has the cash flow, why not share some with investors? Or if the company's stock is cheap, a buyback might be a better option.

Or in Questcor Pharmaceuticals' (NAS: QCOR) case, do both. On Friday, the company announced a new dividend and a doubling of the current stock repurchase program, from 3.2 million left on the last one to a total of 7 million shares.

The company's stock is certainly cheap(er) after the haircuts it's taken recently. First, Aetna (NYS: AET) adjusted coverage of Questcor's Acthar, and investors freaked out, worrying that other insurers would follow suit. And then the company announced that the U.S. government is investigating Questcor's promotion of Acthar gel. Between the two events, shares dropped about 65%.

I've never understood why specialty pharmas like Questcor or Spectrum Pharmaceuticals (NAS: SPPI) would want to buy back shares. It seems like licensing or acquiring drugs would be a better use of capital. Of course, just because the board authorizes the buyback doesn't mean management has to use it.

The $0.20 per share dividend, on the other hand, will be headed to investors that own the stock at the close of business on Oct. 31. That's no token dividend. If the company keeps it up, it'll annualize out to 4.3% of the current stock price. The dividend yield on Amgen (NAS: AMGN) , the only biotech offering a dividend, is only a paltry 1.7%.

It seems like Questcor should be able to afford to keep up the dividend. The company had $115 million in cash and short-term investments at the end of last quarter, and $147 million in free cash flow over the last 12 months. At a rate of $0.20 per share, the dividend costs the company only $13 million per quarter with the current 64 million shares outstanding.

That assumes, of course, everything is business as usual with the company, which it may not be. The company might have less cash if the government fines it for improper marketing, and sales might drop if insurers don't cover the drug for every use doctors have been prescribing it for.

The siren of dividends will try to lure investors into Questcor, but I'd suggest you stick cotton balls in your ears and click here for three Dow stocks that have an X factor that makes them stand out from their illustrious Dow peers. Find out what it is in the Fool's new free report, "The 3 Dow Stocks Dividend Investors Need."

The article Dividend? Buyback? Let's Do Both! originally appeared on Fool.com.

Fool contributor Brian Orelli has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.