Fish, I think another avenue to explore on this topic is why companies return money to shareholders at all, either through dividends or share repurchase. As you say it can sometimes correctly be because there are no additional investment opportunities. A related point is that demanding the return of capital is a way for investors to enforce discipline on a management team. Having too much capital to invest to achieve certain goals can be wasteful if the same goals can be achieved with less. Management will tend to "gold plate" their plans to ensure success rather than take a more appropriate level of risk.
Another interesting aspect of stock repurchases is how they are perceived relative to dividends. Companies can start and stop stock repurchases with very little consequence. On the other hand, cutting or halting dividends is seen as an extraordinary step, a declaration that business as usual can't continue.
One case study of both of these points is Target's disastrous attempted expansion into Canada (full disclosure: I worked at Target while this happened). As the Canadian project drained cash and resources from the company stock repurchases were completely halted. But dividends were sacrosanct and continued. Arguably the commitment to pay dividends limited the total investment the company could make in the Canadian project and acted as a buffer to protect shareholders.
Thanks Aaron, it makes sense to me that returning capital to shareholders can enforce discipline and prevent management from over-investing in projects. The flexibility of stock repurchases versus the perceived permanence of dividends creates interesting dynamics, as you noted.
The Target Canada example is particularly insightful, showing how dividends can act as a constraint to avoid overcommitment while still protecting shareholder value. Thanks for sharing this perspective!
Fish, I think another avenue to explore on this topic is why companies return money to shareholders at all, either through dividends or share repurchase. As you say it can sometimes correctly be because there are no additional investment opportunities. A related point is that demanding the return of capital is a way for investors to enforce discipline on a management team. Having too much capital to invest to achieve certain goals can be wasteful if the same goals can be achieved with less. Management will tend to "gold plate" their plans to ensure success rather than take a more appropriate level of risk.
Another interesting aspect of stock repurchases is how they are perceived relative to dividends. Companies can start and stop stock repurchases with very little consequence. On the other hand, cutting or halting dividends is seen as an extraordinary step, a declaration that business as usual can't continue.
One case study of both of these points is Target's disastrous attempted expansion into Canada (full disclosure: I worked at Target while this happened). As the Canadian project drained cash and resources from the company stock repurchases were completely halted. But dividends were sacrosanct and continued. Arguably the commitment to pay dividends limited the total investment the company could make in the Canadian project and acted as a buffer to protect shareholders.
Thanks Aaron, it makes sense to me that returning capital to shareholders can enforce discipline and prevent management from over-investing in projects. The flexibility of stock repurchases versus the perceived permanence of dividends creates interesting dynamics, as you noted.
The Target Canada example is particularly insightful, showing how dividends can act as a constraint to avoid overcommitment while still protecting shareholder value. Thanks for sharing this perspective!