One Thing Every Dividend Investor Should Know

By “following the money”, income seeking investors can assess if a company is committed to an increasing dividend.

The Motley Fool

Companies like Canadian Pacific Railway (TSX: CP)(NYSE: CP) that generate more cash than required to meet operational needs have, in essence, three basic options – grow revenue by investing in R&D or buying a competitor, pay a dividend, or repurchase stock through a share buyback program.

Knowledgeable income-seeking investors choose companies that are committed to raising their dividend consistently over time. And by better understanding who owns a company’s shares, “following the money” if you will, investors can better determine the likelihood of regular, growing dividends.

So much cash, so few options

Canadian Pacific had a great 2013 — record revenue, an all-time low operating ratio and improved productivity across the board. And it has a lot of free cash — $530 million at the end of its latest quarter.

Earlier this month, Canadian Pacific unveiled a share buyback plan to repurchase up to 5.3 million shares, or about 3% of the total outstanding, over the next year. Based on the stock’s current share price, the value of the program could reach nearly $840 million.

An analysis of who owns Canadian Pacific stock reveals why the company’s first choice was a share buyback program, and not a dividend raise.

Based on data compiled by Bloomberg, U.S. investors own nearly 73% of Canadian Pacific’s stock, compared to just 47% for Canadian National. And U.S.-based hedge fund Pershing Square Capital, managed by famed activist investor Bill Ackman, controls nearly 10% of Canadian Pacific stock.

American investors in Canadian companies tend to prefer share buyback programs due to the heavy taxation of dividends from companies north of the border. On a possible dividend increase, Hunter Harrison, Canadian Pacific’s CEO, commented that, “U.S. holders are not crazy about dividends because of the tax treatment. U.S. investors would rather have a buyback than a dividend.”

Share buyback vs. dividend increase
Unfortunately, the case for share buyback programs enhancing shareholder value is a difficult one to make. Corporate boards often initiate share buyback programs at inopportune times. With Canadian Pacific’s stock approaching an all-time high, now is not the best time to begin buying in the interest of creating shareholder value.

Then there is the issue of who truly benefits. By reducing the number of outstanding shares and increasing various per-share measures, share buyback programs provide a boost to the value of stock-based pay provided to a company’s senior management, but does little for the average investor.

Foolish bottom line

Canadian Pacific will likely initiate a nominal dividend increase when it announces first-quarter results later this month. But it will be much smaller given the large financial commitment already made to the share buyback program that primarily benefits the large number of U.S. based investors in Canadian Pacific. Canadian investors seeking dividend income would be well served to always remember to follow the money.

More on Investing

Group of people in a line at an ATM waiting to make a cash withdrawal
Dividend Stocks

The TFSA Withdrawal Rule Every Canadian Should Know

The account is a much better place to invest long term than to make frequent trades and withdrawals.

Read more »

scanning a package shipping label for ecommerce delivery
Stocks for Beginners

The 2 Canadian Stocks I’d Load Into My Portfolio Without Hesitation

CCL Industries continues to pair earnings growth with strong cash generation, while Restaurant Brands is benefiting from improving momentum at…

Read more »

man shops at grocery store
Dividend Stocks

The Best Canadian Stocks for Conservative Investors Right Now

These two Canadian stocks combine durable businesses, growing earnings, and shareholder returns.

Read more »

Three children jump on an outdoor trampoline
Dividend Stocks

2 Solid Dividend Stocks Down 20 Percent to Buy Before They Bounce Back

These Canadian companies have been increasing their dividends year after year, while their stocks have pulled back from recent highs.

Read more »

happy woman throws cash
Dividend Stocks

The Ideal TFSA Stock: A 5.9% Yield-Paying Constant Cash

Enbridge’s predictable cash flows, substantial growth pipeline, and long history of dividend increases underpin its long-term investment appeal for TFSA…

Read more »

woman gazes forward out window to future
Dividend Stocks

Dividend Income in Retirement: What Could Go Wrong?

Dividend investing is a proven way to create income in retirement but you must know the risks you need to…

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

A 5% Monthly Payer I’d Buy for My TFSA: About $100 a Month on $24,000

Canada’s largest residential landlord offers a high yield, reliable monthly income, and a tax-sheltered foundation for TFSA investors.

Read more »

Energy Stocks

Why Canadians Love Dividend Stocks (and What Beginners Should Know)

Canadian stocks like Enbridge are prime examples of the many benefits of dividend stocks, such as reliability and income.

Read more »