Damodaran on Dividends and Stock Buy Backs

Professor Aswath Damodaran, Professor of Finance at the New York University’s Stern School of Business observed in his study of the 10 year historical dividend policies of all U.S. public listed companies, that there is general degree of inertia in company dividend policies – most companies pay out dividends that are similar to their past financial years.

Stock buy-backs, another mechanism to return financial incentives to shareholders, are then discussed. Damodaran goes on to point out how stock buy-backs have overtaken dividend payouts as a preferred mechanism for returning money to shareholders, and closes with a humorous analogy between marriage and “hooking up” to illustrate a company’s preference to choose stock buy-backs over paying dividends.

All in all, an excellent primer into dividends and stock buy backs that is useful for any financial modeling and valuation exercise.

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