Ashwath Damodaran Hits Out At Buyback Critics: Explains Why They've Replaced Dividends As A Mode Of Cash Return

Valuation guru Ashwath Damodaran has hit back at share buyback critics at a time when capital markets regulator SEBI has imposed restrictions on bids, prices, and volumes of companies conducting share buybacks through the open market via stock exchanges.

What Happened? Damodaran in a recent blog post wrote about how buybacks have become more popular than dividends as a mode of cash return to shareholders. The professor of finance at Stern School of Business at New York University also writes about how buybacks have gotten more flexible than dividends too over time.

“The default mechanism for returning cash at US companies has become buybacks, not dividends,” writes the finance professor explaining how the move to buybacks has evolved over the past 3-4 decades.

“In 1998, buybacks exceeded dividends for the first time in US corporate history and by last year, buybacks accounted for almost two-thirds of all cash returned to shareholders.”

Citing 2022 data broken down region-wise, Damodaran notes that the UK, Canada, Japan, and Europe are also “seeing a third or more of cash returned in buybacks, as opposed to dividends.”

“Among the emerging market regions, Latin America has the highest percentage of cash returned in buybacks, at 26.90%, and India and China are still nascent markets for buybacks,” stated the valuation expert.

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Ashwath Damodaran goes on to reveal that while the impact on equity for a company is exactly the same when choosing between paying dividends and buying back stock, there are factors why buybacks have taken the cake over time.

“The key to understanding why companies may choose one over the other is to start with the recognition that in much of the world, dividends are sticky, i.e., once initiated and set, it is difficult for companies to suspend or cut dividends without a backlash,” he states.

“In contrast, companies are far more willing and likely to revisit buybacks and slash or suspend them, if the circumstances change, making it a far more flexible way of returning cash,” he goes on to reveal pointing at data points gathered from over the past three decades.

SEBI’s new changes: The country’s capital markets regulator on Wednesday reduced the timeline for completion of the buyback by 18 days. SEBI has achieved this by removing the requirement of filing a draft letter of offer with the regulator and its observations.

SEBI, per its latest circular, has also reduced the duration of the tendering period and the period available for payment of consideration to the shareholders.

The new rules also permit upward revision of buyback price until one working day prior to the record date.

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Posted In: Ashwath DamodaranCash Return Modesdividend yieldsSEBIShare buyback