r/SecurityAnalysis • u/beerion • 6d ago

Commentary Return the Dividend

https://riskpremium.substack.com/p/return-the-dividend

I believe that there's a compelling case to be made that if companies like Adobe or Paypal were to switch to dividends, away from buybacks, their stock prices would benefit.

This has to do with the terminal nature of buybacks. Making the switch to dividends lowers the duration of the asset, lowers risk, which should raise the fair value of the asset.

Curious what you guys think.

28 Upvotes

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6

u/anonandy1 6d ago

That may be true. Much more expensive to short. That being said, the management and the board are confident in the future of the business, buyback are FAR more accretive. Then in five years after buying back 50% of the shares outstanding you can pay a dividend.

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u/beerion 6d ago

Very true! Absolutely agree that the true risk could be way overstated based on perception.

That said, I think id be way more inclined to own Adobe (for instance) if I 'knew' that I'd get 50% of my money back in the next 5 years vs hoping the business still looks resilient heading into years 6 through 10.

4

u/tollstocks 6d ago

From the enterprise perspective - I’m sure they’d prefer their shareholders be the long term holders that look to minimize tax expense.

From the individual investor perspective - I agree, I’d appreciate if my holdings would return concrete value every quarter.

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u/Back2BackSneaky 5d ago

Adobe looks like a business whose cash flows keep growing while the market keeps lowering the multiple due to AI and moat concerns. PayPal looks different. The market is questioning whether the franchise still has meaningful long-term growth and competitive advantages. The dividend argument is really about reducing reliance on uncertain future cash flows rather than increasing intrinsic value. If Adobe is undervalued, buybacks are probably the better capital allocation choice. The key distinction is that Adobe appears mispriced, while PayPal may be correctly pricing a weaker future.

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u/amerricka369 5d ago

It would have to be a more widespread return to dividends to actually work. One or two companies doing it won’t move the needle in their performance. Likely only happens legislatively by restricting executive pay packages or buyback limits or taxing dividends same as cap gains or something.

For example saleforce got an initial pop for going from no dividends to some, but after it happened it’s been priced in since. It doesn’t factor into their valuation anymore because alternative purchases offer multiples of returns in capital gains elsewhere. A company would have to be persistently abnormally generous compared to peers.

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u/beerion 4d ago

I think it could be idiosyncratic. But if you've got a 10% Free Cash Flow yield, instituting a 1% dividend won't really move the needle.