Tuesday, November 28, 2006

Dividend Growth versus Stock Buybacks

In today's Ahead of the Tape section of The Wall Street Journal, the column discusses some pros and cons of stock buybacks. The article cautions investors that a company's stock buyback announcement should not be taken at face value.
"Buybacks aren't always what they seem. A company might throw confetti for its share repurchase plan with one hand while issuing shares with the other."
The article further cautions investor not to mistake earnings per share growth from buybacks with actual EPS growth.
"At the same time, investors need to be careful to avoid mistaking earnings-per-share growth from buybacks for actual earnings growth."
One way an investor can obtain insight into the true earnings picture of a company is to review the company's cash flow statement. Additionally, an investor can monitor the dividend growth rate of a company to better gauge what the company's board might be projecting about future business prospects. If the dividend is not growing at a rate equal to or greater than the historical dividend growth rate for the company, maybe the earnings growth of that particular company is being enhanced by other factors such as stock buybacks.

Self-Serve in the Boardroom
The Wall Street Journal Online, November 28, 2006 http://online.wsj.com/article/SB116466998414033857.html?mod=mkts_main_featured_stories_hs

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