Sunday, October 07, 2007

Greenspan's View of Dividends Versus Stock Buybacks

Alan Greenspan recently conducted an interview at Bloomberg LP in London. One of the topics Greenspan discussed was the issue of a company returning cash to shareholders via stock buybacks. One can surmise that he also believes a company will initiate buybacks when internal investment opportunities are lower than the "...average rate of return in the corporate structure."

An excerpt from the interview:
Just as importantly is the evidence of the very large swing towards the boards of directors essentially giving back part of corporate cash flow. You can see it obviously not only in dividends, but most importantly in share buybacks and the huge amount of cash that's going back to common shareholders as a result of M&A deals closing.

Cash goes back when you don't have a use for it that is creating a rate of return superior to the average rate of return in the corporate structure (emphasis added). I mean, I served on a lot of boards for a lot of years, and it was fairly universal that you had to indicate to the directors for authorization to get a capital out- rate project going, that the rate of return on a new project was higher than the average rate of existing facilities. If it wasn't, you gave the cash back to the shareholders. So looking at the extraordinary increase in the cash flow back to shareholders, it strikes me that there is an inordinately large proportion of companies who believe that the only places that they can use their monies is either capital investments abroad - and that's actually increasing, but it's still not a big deal - or cash back - cash back to shareholders.

It also implies, if you're not getting rates of return, that the rate of innovation is slowing down. After this big surge we've had, it's not unusual to expect the rates will get some slowing down, and it's the slowdown in the rate of innovation which leads with a lag to a slowdown in the rate of productivity growth, which in turn creates an upward pressure on unit costs, which is a necessary condition for the existence of some form of stagflation.
In my view, these buybacks are a short term commitment by the firm. On the other hand, growing dividends are a longer term commitment on the part of a company and could signal brighter business prospects going forward.


Greenspan Says Chances of Recession have "Risen"
October 3, 2007

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