Not all stocks are created equally: Dividends versus share buybacks

Business majors know that the first concept discussed in finance class revolves around the existential question of what the purpose of finance is.

- ED FRANCISCO ANREW POBLETE

If you listened to your professor, you would know that the universal dogma behind the entire point of finance is the maximization of shareholder wealth. While this answer may seem obvious to the point of absurdity, it is surprisingly also possible for this answer to be considered ambiguous. Sure, any company will endeavor to generate income using its business model, then allocate funds generated to continuously expand, but what can be the subject of debate is how the management of publicly listed stocks spends the company's excess cash after business requirements.

Working under immense pressure from shareholders to increase share prices, the management teams of some Philippine publicly listed stocks have used textbook methods by using excess company cash to conduct share buybacks. However, recent Philippine stock market trends indicate that the distribution of generous dividends is a more effective way of spending a company's excess funds because the uptick of hefty dividends has been more successful than share buyback programs in causing stock prices to go up and stay at that elevated level.

Strong demand for dividend stocks

One cannot discuss dividend stocks without mentioning DMCI Holdings and its subsidiary Semirara Mining and Power Corp., which both set the standard for dividend yields and payouts in the Philippine stock market. It was in 2021 when DMCI and Semirara, with stock prices of around P7.70 per share and P25.00 per share, respectively, first declared record-breaking and above-market dividend distributions on the back of rising prices of their main product, coal.