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.

| More on:
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.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

Businessperson's Hand Putting Coin In Piggybank
Dividend Stocks

How Much Can You Really Earn in Passive TFSA Income?

With a diversified portfolio of high yield stocks like Enbridge (TSX:ENB) you could potentially get up to $4,400 per year…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog

2 Dividend-Paying Stocks to Help You Retire Worry Free

Here's why Toronto-Dominion Bank (TSX:TD) and SmartCentres REIT (TSX:SRU.UN) are two top dividend-paying stocks to buy now.

Read more »


Gildan Activewear: A Canadian Clothing Stock to Watch in 2023

Despite recent sales weakness, Gildan Activewear stock investors are told the company may report record revenues in 2023.

Read more »

data analyze research
Dividend Stocks

2 Stocks to Invest in a Sideways Economy

Not all stocks are equally vulnerable to the weak economy and market, and the right stable investments can help you…

Read more »

Value for money
Dividend Stocks

Why Canadian Investors Should Add This Value Stock to Their Portfolios

This value stock is down now, but this comes all from outside impacts. A year from now, you'll likely wish…

Read more »

edit Colleagues chat over ketchup chips
Bank Stocks

TFSA: 2 Canadian Dividend Stocks for Your $6,500 Contribution Room

These two top Canadian bank stocks could be great investments for a $6,500 TFSA contribution.

Read more »

Various Canadian dollars in gray pants pocket
Dividend Stocks

This 7.1% Dividend Stock Pays Serious Cash

After the pullback, Enbridge stock offers a compelling dividend yield of almost 7.1% It's a good consideration for passive income.

Read more »


Why Canadian Investors Should Consider These 3 Cheap Value Stocks

The Canadian stock market may be trading near all-time highs, but there are still deals to be had. Here are…

Read more »