When a question about the questionable management getting asked the shareholders then –
It is always a debatable situation for paying a high dividend or reinvesting profits into the business.
One of the finance company which paying out lower dividend but reinvesting to the business
One of the capital goods company which pays out a decent dividend
If the company does not require to make a reinvestment of profit and no further huge growth opportunity then the company should pay out a higher dividend. But if a company does not pay out a dividend or pay with a lower payout then market price can be seeming to be lower to the fair value.
Another point is when the financial position of the company is not favorable then the company should work on paying out debt and other obligations first rather pay a dividend.
One of the steel company of India
In theory, we have learned that equity shareholders are the owners of the company but in practice, such things do not go to happens. As a minority shareholder, we need to follow the recommendations given by the management. We cannot go against them.
There can be two types of problems, we found among the management. First, they are not able to run the business efficiently and second, they do not work in the favor of minority shareholders, they make decisions that help them & create their personal wealth. We need to thoroughly read annual reports, footnotes, corporate announcements, etc. for understanding the efficiency and shareholder-friendly behavior of the management.
For checking the efficiency of the company, we need to compare the company with its peers in terms of profitability, size, growth, competitive advantage, etc. If the company is doing better than peers consistently for a longer period of time, then we can say that management can able to run the company more efficiently.
For checking the shareholder friendliness of the management, we need to check compensation, stock ownership, related party transactions, etc.
Though We are owning a 100000, 1000 or 1 share of the company, if we do not read an annual report of the company and company has gone for a toss then we need to only blame ourselves.
The stock repurchase is considered a good strategy, the dividend comes with tax obligation but buyback is tax-free and also improves financial of the company. But in reality, the company issues ESOP to the executives as a performance bonus and that will end up with the dilution of the equity. Many times, buyback is done for counteracting such dilution. Also, stock buyback is done at the overvaluation or at the undervaluation is matters a lot.
Disclosure – Companies mentioned in the article are just for an example & educational purpose. It is not a buy/sell/ hold recommendation.
Read for more detail: The Intelligent Investor by Benjamin Graham, Jason Zweig