Thought Leadership

Which Companies Value their Shareholders? Buybacks vs. Dividends

Throughout the past 20 years buybacks have become an increasingly popular way for senior management to use excess free cash flow generated from business activities. By reducing shares outstanding, buybacks increase the percentage ownership of ongoing shareholders. Unfortunately, buybacks do not treat all shareholders equally.

Buybacks do not carry the same level of commitment as dividends and can be cancelled without the same severity of negative consequences that follow a dividend cut. While in certain circumstances buybacks may be beneficial, they require that management effectively time the market and purchase their shares at a favorable price relative to expected fair value.

Examining the history of buybacks, we can see that companies often implement share repurchase plans when stock prices are higher rather than lower – effectively rewarding selling shareholders, while ongoing shareholders are punished. More concerningly, buybacks are often used to accumulate stock for executive option plans – it is advantageous for executives to buy back stock when prices are high as option strike prices are often considerably lower. Consider the negative impact, for example, executive options to purchase shares at $50 that were recently bought back at $100.

Buyback policies are not consistently aligned with the interests of all shareholders and are often poorly timed. The graph below highlights how recent market volatility has impacted buyback plans in the U.S. market – decreasing over 50% since March. In theory, the market selloff would have been an ideal time to repurchase shares for companies with excess cash reserves; however, the exact opposite occurred.

Bristol Gate invests in companies with growing dividends and a long dividend-paying history. By committing to a dividend policy, our portfolio companies signal a long-term commitment to shareholders by treating all equally. Bristol Gate’s US strategy has achieved an annualized dividend growth rate of over 20% since inception by investing in companies with remarkable ability to increase free cash flow and with strong management teams committed to sustainably returning excess capital to shareholders.

Important Disclosures

There is a risk of loss inherent in any investment; past performance is not indicative of future results. Prospective and existing investors in Bristol Gate’s pooled funds or ETF funds should refer to the fund’s offering documents which outline the risk factors associated with a decision to invest. Separately managed account clients should refer to disclosure documents provided which outline risks of investing. Pursuant to SEC regulations, a description of risks associated with Bristol Gate’s strategies is also contained in Bristol Gate’s Form ADV Part 2A located at

This piece is presented for illustrative and discussion purposes only. It should not be considered as personal investment advice or an offer or solicitation to buy and/or sell securities and it does not consider unique objectives, constraints, or financial needs of the individual. Under no circumstances does this piece suggest that you should time the market in any way or make investment decisions based on the content. Investors are advised that their investments are not guaranteed, their values change frequently, and past performance may not be repeated. References to specific securities are presented to illustrate the application of our investment philosophy only, do not represent all of the securities purchased, sold or recommended for the portfolio, it should not be assumed that investments in the securities identified were or will be profitable and should not be considered recommendations by Bristol Gate Capital Partners Inc. A full list of security holdings is available upon request. For more information contact Bristol Gate Capital Partners Inc. directly. The information contained in this piece is the opinion of Bristol Gate Capital Partners Inc. and/or its employees as of the date of the piece and is subject to change without notice. Every effort has been made to ensure accuracy in this piece at the time of publication; however, accuracy cannot be guaranteed. Market conditions may change and Bristol Gate Capital Partners Inc. accepts no responsibility for individual investment decisions arising from the use of or reliance on the information contained herein. We strongly recommend you consult with a financial advisor prior to making any investment decisions. Please refer to the Legal section of Bristol Gate’s website for additional information at

A Note About Forward-Looking Statements

This report may contain forward-looking statements including, but not limited to, statements about the Bristol Gate strategies, risks, expected performance and condition. Forward-looking statements include statements that are predictive in nature, that depend upon or refer to future events and conditions or include words such as “may”, “could”, “would”, “should”, “expect”, “anticipate”, “intend”, “plan”, “believe”, “estimate” and similar forward-looking expressions or negative versions thereof.

These forward-looking statements are subject to various risks, uncertainties and assumptions about the investment strategies, capital markets and economic factors, which could cause actual financial performance and expectations to differ materially from the anticipated performance or other expectations expressed. Economic factors include, but are not limited to, general economic, political and market factors in North America and internationally, interest and foreign exchange rates, global equity and capital markets, business competition, technological change, changes in government regulations, unexpected judicial or regulatory proceedings, and catastrophic events. Readers are cautioned not to place undue reliance on forward-looking statements and consider the above-mentioned factors and other factors carefully before making any investment decisions. All opinions contained in forward-looking statements are subject to change without notice and are provided in good faith. Forward-looking statements are not guarantees of future performance, and actual results could differ materially from those expressed or implied in any forward-looking statements. Bristol Gate Capital Partners Inc. has no specific intention of updating any forward-looking statements whether as a result of new information, future events or otherwise, except as required by securities legislation.

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