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Cramer: Dividends Trump Buybacks

Monday, 12 Sep 2011 | 7:41 PM ET

Stock buybacks are often like pouring money down the drain, Cramer said Monday. He thinks dividends are a much better way of returning capital to shareholders.

Cramer Asks: Buyback Farce?
Mad Money host Jim Cramer with his take on three egregious users of buyback programs and asks what would have happened if these companies took all the money they spent on share repurchases over the last five years, and had instead returned it to investors in the form of a dividends?

“Dividends put money right in your pocket,” he said. “Buybacks are supposed to help support the share price, but when you look at the actual results, the idea that most buybacks return anything to shareholders has begun to seem nothing short of fanciful.”

To prove his point, the “Mad Money” host took a look at the companies he calls the most egregious users of buybacks—Cisco , Wal-Mart Stores and Exxon Mobile .

Over the last five full fiscal years, Cisco spent $36.4 billion buying back stock, yet its share price still dropped by 10.7 percent. If the company had returned that money to shareholders in the form of a dividend, Cramer said, it would amount to $5.97 a share in dividends over that time period. Assuming the stock’s performance was the same, and not a 10 percent loss, you would have had a 22.3 percent gain.

Wal-Mart spent $35 billion buying back stocks, which Cramer said would have translated into $8.33 a share in dividends. The retailer is up 15 percent over the last five fiscal years, or 27 percent including the company’s current dividend program. Assuming Wal-Mart shares delivered the same performance instead of a 27 percent gain, shareholders would have seen a 33 percent return if the buyback money went to dividends.

And finally, Exxon Mobile spent $130 billion on buybacks during the five year period, which is enough money to have covered $21.31 per share in dividends. The company gave shareholders a 45 percent return, including dividends, during that period. But if it had not bought back stock and instead boosted the dividend, assuming the stock went up the same amount, shareholders should have gotten a 68 percent gain.

Cramer also likes that dividend yields get bigger as a stock goes down. But when a company buys back stock and the share prices go down, he said, there is no benefit.

What’s more, short-sellers hate to bet against stocks with dividends because when they borrow shares in order to short them, they have to cover the dividend payments as well.

“All a buyback really seems to do [is] give management the ability to shrink the share-count in order to produce, I think, artificial earnings beats,” Cramer said. “Shame on those who keep buying back their stock in light of these very telling numbers.”

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