Saturday, November 24, 2007

Dividend Increases Improve Valuation Multiples More Than Share Buybacks

The Boston Consulting Group's 2007 Value Creation Report notes dividend increases do more to increase shareholder value than stock buybacks. The report notes one reason company's use cash to buy back shares is "buybacks boost EPS above the level that underlying organic growth in net income would on its own." The BCG report notes, "that EPS growth is not necessarily a differentiator of multiples. And when it is, investors are extremely sensitive to how the EPS is delivered."

The BCG research demonstrated that:
  • dividends have a far more positive impact on a company's valuation multiple than share repurchases do.
  • the report also noted that share repurchases actually erodes a company's valuation multiple as detail in the table below.
(click on graphic for larger image)

dividend payout versus stock buyback impact on valuation multiple September 2007
Avoiding the Cash Trap
The Boston Consulting Group
By: Eric Olsen, Frank Plaschke, Daniel Stelter
September 2007

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