Dividends and Share repurchases

There are only 2 weeks of PGDA left until the students leave for a well earned study break.  The final few Financial Management topics are focused on corporate finance and this week is no different – Dividends and Share repurchases.

Here are some interesting stories that show the relevance of this topic:

The blowback on buy-backs

You point to share buy-backs as a quick fix for stagnating businesses (“The age of the torporation”, October 24th), but look deeper and it is worse than that. Big tech players in America like Cisco, IBM, Microsoft and Intel have bought back billions of shares in recent years, mainly to soak up share grants issued to management and employees. Shareholders in these companies see little benefit from the vast sums expended. IBM spent $121 billion on buy-backs over the past decade, nearly 100% of its $129 billion market capitalisation in 2005, yet its share count has only been reduced by 40%.

As these grants turn into new shares earnings per share take a hit, so management are driven to sterilise this dilution with more buy-backs. Buy-backs are a way for managers to pay shareholder’s funds, to management. At best, buy-backs at large tech giants are a waste of money; at worst it’s a way of fiddling the accounts.

Manager of the Lombard Odier technology fund

I hope you enjoyed seeing the relevance of this topic.  Please share any interesting stories or questions in the comments section below.  All the best with these final few weeks!

Paul Maughan

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