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Why these shares that DON'T pay dividends just could be the best investments right now

by , 17 July 2019
Why these shares that DON'T pay dividends just could be the best investments right now
There are 275 dividend paying shares in the JSE today. They average a dividend pay-out of 3.88%.

While a 3.88% dividend is surely better than nothing - this doesn't even cover the interest you'd have received on your cash with a fixed deposit.

And, once that money is paid out by a company the money is lost to it forever.

But what if I told you there's a better option - a company that doesn't pay dividends - but it returns cash in a way to shareholders so keep on benefiting long after!

Let me explain…
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Share buybacks are the new dividends
 
Shareholders invest in publicly traded companies for capital appreciation and income. There are two main ways in which a company returns profits to its shareholders – cash dividends and share buybacks.
 
Companies these days are loathe to increase dividends – because if a dividend cannot be sustained investors punish companies.
 
But share buybacks is another way to provide investors with returns – without creating expectations of recurring buybacks.
 
According to the Financial Times, US companies spent $223 billion on share buybacks in the fourth quarter of 2018 alone.
 
So clearly share buybacks are a popular option these days.
 
In fact, because of these reasons I’m about to share with you, share buybacks are a more attractive option than dividends on the JSE right now.
 
Why share buybacks are more attractive than dividends
 
Dividends attract tax immediately – When you receive a dividend 20% tax is levied on it – meaning you lose a significant portion of your return immediately. There aren’t really ways for you to lower the amount of tax you pay on these dividends. On the flipside – if a company does a share buyback and its share price rises as a result there is no tax payable by you – until you sell your shares. And even then – you pay capital gains tax at a maximum of 18% and you get an annual exclusion on the first R40,000 capital gains you make each year.
 
Once a dividend is paid the money is gone – Once a company pays a dividend the cash is gone and won’t have any effect on the company or its share’s future performance. Share buybacks differ from this… You see, if a company buys back shares its total shares in issue shrinks and thereby its earnings per share increases – even if profits remain flat in the future.
 
Share buybacks actually HELP when a share is undervalued – When a share is undervalued a dividend often doesn’t make a difference. But share buybacks can actually push the price of a share upward if the company does it when the share is under-priced!  

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This penny share just did a massive share repurchase – and its already pushing up its price
 
Argent Industrial spent much of the past three years on restructuring its business. It’s gotten rid of subsidiaries that weren’t contributing and it’s bought businesses (offshore) that are adding value.
 
Because of some of the transactions the company’s done it is cash flush – and its shares are really cheap.
 
So, it is in the process of buying back shares on the market.
 
The company bought around 1.15 million shares at around R5.20 over the past four months.
 
This follows on the company repurchasing another 4.82 million shares earlier the year.
 
What’s more – the company is authorised to buy backing a further 11.45 million shares.
 
By doing that the company would effectively increase its earnings per share by as much as 15% - even if there’s no profit growth on an absolute basis.
 
But if profits organically grow by around 5-10%, the share repurchases could see per share profits rise by 20, 30 or even 40%.
 
Argent currently trades on a PE ratio of only 5.4, with the company’s net asset value (NAV - an indication of the value of all its assets, minus all its debt) sitting at R13.05. That means the share sells at 60% less than the value of its assets…
 
So every share it buys back means the value of shares continue to increase – and investors will have to take notice!
   
Here’s to unleashing real value,
Francois Joubert,
Editor, Red Hot Penny Shares 
 
P.S. Right now, Argent plus three other stocks are my top stocks to buy right now – you can read more about them here.


Why these shares that DON'T pay dividends just could be the best investments right now
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