Dividends, Buybacks Dull Effect of Rates

ARTICLE# 2.wsj.com/articles/why-arent-low-rates-working-blame-dividends-1465119005″>http://www.wsj.com/articles/why-arent-low-rates-working-blame-dividends-1465119005Dividends, Buybacks Dull Effect of Ratesby: Greg IpJun 06, 2016SUMMARY: One of the great mysteries of the recovery is why low interest rates have done so little to lift business investment. After all, that is supposed to be one of the ways monetary policy works: A lower cost of capital makes any project more viable. But what if lower interest rates are actually hurting investment by encouraging companies to pay dividends or buy back stock instead? That’s the theory advanced by economist Jason Thomas of private-equity giant Carlyle Group. It is at odds with conventional economics but has some intuitively appealing logic and supportive data.CLASSROOM APPLICATION: The article can be used to discuss how low interest rates have affected corporate stock buybacks, dividends, and investment levels. It can also be used to discuss the relationship between a firm’s payout and investment policies, how interest rates affect net present values, why high-yielding stocks outperform the market as a whole, and to compare dividends and stock buybacks.QUESTIONS:1. By how much have companies boosted stock buybacks, dividends, and investment since 2009?2. How are dividends and stock buybacks similar? How are they different?3. Is the payout policy of a firm related to its investment policy? If so, how? If not, why not?4. How do low interest rates affect business investment opportunities? Why might low interest rates fail to stimulate greater business investment?5. Why do you think higher-yielding stocks outperform the market as a whole? Why might this relationship become “more extreme the lower rates go and the longer they stay low”?