"No One Cares About Your Dividends"

Submitted by QTR's Fringe Finance

One of my favorite investors that I love reading and following, Harris Kupperman, has offered up his thoughts on dividends versus buybacks this week.

Harris is the founder of Praetorian Capital, a hedge fund focused on using macro trends to guide stock selection.

Harris is one of my favorite follows and I find his opinions - especially on macro and commodities - to be extremely resourceful. I’m certain my readers will find the same. I was excited when he offered up his latest thoughts, published below. Content has been edited slightly for grammar.

Please be sure to read both my and Harris’ disclaimers, located at the bottom of this post.

Just Smash the Buybacks

Great! Another E&P that raised the quarterly dividend by two cents. Who F*cking Cares!?

The debate about buybacks vs. dividends has been going on for over a century. I’m not here to try and change your mind. I can see the relative merits of both, especially as many buybacks have been undertaken at insane valuations, leading to value-destruction.

However, I’m going to make a special point when it comes to my “basket of deplorables,” or those companies that trade at mind-numbingly cheap valuations as they don’t quite check the ESG box. Look, I think if you trade at less than five times full-cycle cash flow, you should first make sure that you’re de-levered, with a rainy-day fund as well—trust me, no one is coming to save you when things go bad.

After that, you should probably plow every last cent into buybacks. M&A and growth initiatives always sound sexy, but they are never as sexy as buybacks. Buybacks are the value creator. For that matter, while I’m sympathetic to trying to time the buyback to coincide with pullbacks in the equity price, most management teams are terrible at trading their shares. Besides, the consistency of the buying is what creates the value. Just turn on the VWAP machine and forget about it. Every quarter, tell the world that you bought back a few percent of the shares outstanding. Give all the value investors hope that when they need to sell, there’s going to be a bid in there, because we know that no one else will be deploying capital into the “deplorables.”

Here we are, a few years into this ESG cycle, and the outcomes delivered by various capital allocation strategies cannot be starker. Some companies “rewarded” shareholders with dividends and their shares have gone nowhere. Arguably, their performance has been made worse as value funds sold at a loss, following the underperformance caused by these companies’ shares not appreciating, and the redemptions that they engendered. Other companies have been multi-baggers as they consistently applied almost all the cash flow to buybacks.

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Just think about how accretive it is to buy back your shares at a low-single-digit multiple of cash flow and a fraction of replacement cost of your assets. Especially as there are now constraints on ever adding more capacity in many of these industries. The accretion is just insane, and shareholders are starting to wake up to this fact when they decide which “deplorable” to invest in. It makes me wonder why anyone would ever issue a dividend, yet these management teams keep doing it.

Look, no one cares about your dividends, and no one cares when you increase the dividend as no one ever believes that the dividend is sustainable. You aren’t a REIT that’s supposed to grow the dividend each quarter, you’re a cyclical business with volatile quarterly earnings. You’re a clunky business that even your shareholders probably wish they weren’t invested in. They only own you because you’re too cheap to ignore. Their biggest worry is that the shares stay cheap indefinitely and their clients yank their money to buy MAG7, since that actually goes up.

Dividends won’t fix this. There are already hundreds of companies with low-teen yield that everyone has forgotten about. Yield investors won’t be attracted as they know you’ll cut the dividend during the down-cycle, generalist investors still cannot own you, and that yield isn’t enough to overcome the undertow of value investors getting redeemed for underperformance. Besides, it’s not even tax efficient to pay dividends.

It’s time that we hold these management teams accountable and tell them to just smash the buyback button. If someone will sell the shares cheap, then take advantage of those idiots. Look at some of the coal companies that have bought back huge percentages of the shares outstanding over the past few years. Despite that, they still trade at between two and four times cash flow! Imagine how much worse the share-price performance would have been without the buybacks?

Guys aren’t selling these coal companies because they’re no longer cheap—they’re the same cash flow multiples that they were a few years ago. Rather, guys are selling because they have redemptions. Just keep taking advantage of this fact, until the situation changes. Smash the buyback button…

QTR’s Disclaimer: I am an idiot and often get things wrong and lose money. I may own or transact in any names mentioned in this piece at any time without warning. Contributor posts and aggregated posts have not been fact checked and are the opinions of their authors. This is not a recommendation to buy or sell any stocks or securities, just my opinions. I often lose money on positions I trade/invest in. I may add any name mentioned in this article and sell any name mentioned in this piece at any time, without further warning. None of this is a solicitation to buy or sell securities. These positions can change immediately as soon as I publish this, with or without notice. You are on your own. Do not make decisions based on my blog. I exist on the fringe. The publisher does not guarantee the accuracy or completeness of the information provided in this page. These are not the opinions of any of my employers, partners, or associates. I did my best to be honest about my disclosures but can’t guarantee I am right; I write these posts after a couple beers sometimes. Also, I just straight up get shit wrong a lot. I mention it twice because it’s that important.

Harris’ Disclosure: Funds that I control are long companies with dividends instead of buybacks. (I intend to have words with these management teams). More: FULL DISCLAIMER