When your business is shrinking, you must find other ways to add value. So CBS is continuing to “return capital to shareholders” by increasing its dividend 14% and announcing a $1.6 billion buyback that would reduce its outstanding share base by about 9%. These moves follow a 10% dividend increase and $1.4 billion buyback earlier in the year.
The new per-share quarterly dividend will now be 25 cents, resulting in an annual payout of $1.00 and a yield (at the current share price of about $31) of 3%. The increase is helpful, but if you’re pessimistic about CBS’s financial engineering abilities, you would do better owning a Treasury bond.
The buyback, meanwhile, would shrink the share base by about 52 million shares, or 9%–which, all else being equal, would drive a similar increase in earnings per share. To fund the buyback, however, the company will likely take on additional debt and sacrifice interest income, so the per-share boost will probably be lower. Also, debt-financed buybacks aren’t so much “returning capital to shareholders” as “taking capital from lenders and giving it to equity investors,” and CBS investors would be wise to view it as the latter.