Not all stocks are created equally: Dividends versus share buybacks

Business majors know that the first concept discussed in finance class revolves around the existential question of what the purpose of finance is. If you listened to your professor, you would know that the universal dogma behind the entire point of finance is the maximization of shareholder wealth. While this answer may seem obvious to the point of absurdity, it is surprisingly also possible for this answer to be considered ambiguous. Sure, any company will endeavor to generate income using its business model, then allocate funds generated to continuously expand, but what can be the subject of debate is how the management of publicly listed stocks spends the company’s excess cash after business requirements.

Working under immense pressure from shareholders to increase share prices, the management teams of some Philippine publicly listed stocks have used textbook methods by using excess company cash to conduct share buybacks.

However, recent Philippine stock market trends indicate that the distribution of generous dividends is a more effective way of spending a company’s excess funds because the uptick of hefty dividends has been more successful than share buyback programs in causing stock prices to go up and stay at that elevated level.

Strong demand for dividend stocks

One cannot discuss dividend stocks without mentioning DMCI Holdings and its subsidiary Semirara Mining and Power Corp., which both set the standard for dividend yields and payouts in the Philippine stock market. It was in 2021 when DMCI and Semirara, with stock prices of around P7.70 per share and P25.00 per share, respectively, first declared record-breaking and above-market dividend distributions on the back of rising prices of their main product, coal.

Investors since then have continued to buy and hold both DMCI and Semirara, thereby pushing their share prices upwards, due to their sustained double-digit dividend yields, until peaking at P13.00 per share and P44.40 per share, respectively, before settling at still formidable current levels of around P10.70 per share and P32.60 per share, respectively, constituting two of the best-performing Philippine stocks during that span.

Another double-digit yield dividend stock that has performed exceptionally is the LT Group, whose share price increase, from around P9.00 per share just when it started declaring its highest dividend payout in history in 2022 to present levels of around P12.80 per share, can be attributed once more to the preference of investors to buy and hold dividend stocks.

OceanaGold Philippines Inc. also credits its distinction as one of the more successful post-IPO performances in recent memory to the market’s warm reception towards dividend-paying stocks.

Before its IPO, OceanaGold was marketed as a high-yield dividend stock, committing to reward its shareholders quarterly with 90 percent of its free cash flow. Investor excitement for the company’s promising and steady stream of dividend payments is reflected by OceanaGold’s ascent from its IPO price of P13.33 per share in 2024 to its present level of around P17 per share.

Why share buybacks do not always work

In concept, share buybacks have a positive effect on a company’s share price because buybacks signal strong management support for the company’s intact fundamentals and falling share price, and make the company long-term, even perpetual, holders of its own stocks, consequently decreasing the supply of stocks in circulation that may be used to pressure the price downwards.

In the academic domain, share buybacks are simply known as the acquisition of treasury shares, which increases earnings per share and makes stocks more attractive to investors.

An example of a company that recently made a successful buyback move is ICTSI, which repurchased shares from the P370 to P400 per share levels that are now comfortably sitting at around P415 per share.

Scanning the broader market, however, buybacks have generally not been providing the desired results because of the uncertainty and negative sentiment weighing down on the entire market, handicapping many stocks from reaching new highs. There are many listed Philippine companies whose share prices tank further even after billions of pesos were spent repurchasing shares.

Even if it can be said that the share prices of certain companies would have just plummeted even more had shares not been bought back, unfruitful buyback programs can still deal a blow to company coffers, morale and perception, and at some point, management teams will have to reevaluate if the excess company funds used for buybacks can be used better elsewhere – perhaps to declare more dividends to mirror the rise of the high-yield dividend stocks mentioned above. Moreover, buybacks may be difficult to justify because shares repurchased at a low price cannot be monetized by the company even if the price goes up, unless it is reissued to the open market – though this is not usually done and the market may not be able to stomach this – or owners cash out, both of which will be viewed negatively by investors and will push the price back downwards.

Side by side

Following the philosophy of one bird in the hand being worth more than two in the bush, the market’s preference for dividend stocks exemplifies the cautious stance of investors in this market that is in a downtrend or moving sideways at best.

Although subject to a 10 percent withholding tax, unlike share buybacks which are essentially tax-free, dividend payments make for real tangible wealth that is already guaranteed and credited to your account, in contrast to the unrealized gains – if any – brought about by buybacks, which can be taken back by the market anytime.

For an apples-to-apples comparison, Universal Robina Corp. instituted a P3 billion share buyback program when its stock price was at P126.70 per share, but the stock recently dipped to as low as P57.80 per share despite aggressive buyback efforts and sharply bounced back to its current levels of around P88 per share, partly because stock market analysts pointed out that the dividend yield had reached an unprecedented level of six percent to seven percent, which was already too good to pass up.

In addition to this example, Ayala Land REIT and Robinsons Land REIT have rallied from their December 2023 lows of around P30 per share and P4.75 per share, respectively, to current levels of around P40 per share and P7.10 per share, respectively, owing to their attractive dividend yields, as compared to their parents Ayala Land and Robinsons Land, which have gone down from around P31 per share and P14.60 per share, respectively, to current levels of around P23 per share and P13 per share, respectively, during the same period, in spite of their massive buyback programs and dividend distribution, though at much lower yields compared to their REIT subsidiaries.

Taking everything into account, there is no one-size-fits-all approach that instantly increases a company’s share price, but given the sustained high share prices of high-yield dividend stocks, the reallocation of excess funds to dividend payments as a strategy to boost share prices—whether from share buyback funds or other sources—should warrant more consideration from the management teams of listed Philippine entities.

Written by Eduardo Francisco and Andrew Poblete of BDO Capital & Investment Corp. To learn more about SharePHIL, visit https://bit.ly/m/sharephil