Dividends Over Buybacks

Many companies could have better served their shareholders by paying dividends, Cramer said Wednesday, rather than buying back stock. Buybacks no doubt have their place, but some firms have virtually thrown money away in the process, money that should have gone to investors. Not only was stock purchased at much higher prices, but insiders were the people selling. Management made its buck without concern for the shareholders.

Some of the worst offenders operate in the HMO industry, namely Aetna, WellPoint and UnitedHealth . Aetna pays out a 4-cent, once-a-year dividend, which totaled $59.2 million between 2006 and 2008. But over the same period the company bought back $5.8 billion worth of stock, all while AET’s share price fell more than 50%. Aetna still has $614.2 million set aside in its repurchase authorization, which could be returned to investors in the form of a $1.25-a-share dividend. Add on that 4-cent payout, and Aetna’s yielding a healthy 6%.

WellPoint’s no better. In fact, by one measure it’s worse: The company pays no dividend. So shareholders got nothing while the company spent about $14 billion buying back stock between 2006 and 2009. And over that time, WLP has dropped 60%. If the $820 million in the repurchase authorization were used for a dividend, WLP would offer $1.57 a share, or 4.7%. A sizable dividend such as that would push the stock higher as investors flocked to it for safety, and that would keep the shorts at bay (because they’d be forced to pay the dividend to stay short).

UnitedHealth tells a similar story, with the company spending $11.6 billion on buybacks between 2006 and 2008 as the share price dropped a whopping 71%. Dividend payouts, however, totaled just $118 million.

The moral of the story? This waste of money has done little more than offer a tiny boost to these companies’ earnings per share without actually growing profits. The buybacks reduced the stocks’ floats, to benefit of insiders apparently, but that’s about it. Paying shareholders, on the other hand, could have shown legitimate benefits to Aetna, WellPoint and UnitedHealth, because, historically, 40% of a stock’s return has come from dividends.

So what’s worse, Cramer asked, paying a dividend that could always be cut if necessary, or flushing billions of dollars down the drain buying back a depreciating stock?

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