Few investment metrics are as iconic as the dividend yield, a snapshot of a company’s payout relative to its stock price. This is a crucial starting point for income investors.
However, another important measure – and one that is not as widespread – is shareholder yield, which combines dividends and share buybacks. Buybacks and dividends offer different benefits. A dividend is money in the shareholder’s pocket today. A buyout, however, can provide longer-term satisfaction. A lower number of shares can increase earnings by and possibly increase the stock price over time.
“When we look at companies, it’s in the context of are you a good allocator of capital?” says John Tobin, portfolio manager and principal research analyst at asset manager Epoch Investment Partners. Tobin’s duties include the co-management of two mutual funds for which the firm is the sub-advisor, including the
U.S. Stock Performance MainStay Epoch
funds (ticker: EPLPX). “It’s always this question of how the company generates cash and how does it allocate cash.”
|ETF / Symbol||Dividend yield||Net redemption yield||Shareholder return|
|SPDR S&P 500 ETF Trust / SPY||1.35%||1.82%||3.17%|
|Utilities / XLU||3.13||-0.85||2.27|
|Technology / XLK||0.85||2.03||2.88|
|Consumer Discretionary / XLY||0.63||1.62||2.26|
|Industrial / XLI||1.48||1.84||3.32|
|Basic consumption / XLP||2.40||1.21||3.61|
|Health / XLV||1.53||1.22||2.75|
|Finance / XLF||1.53||1.22||2.75|
|Energy / XLE||3.22||0.74||3.95|
Note: Data as of February 28 and based on the previous 12 months. Note: The names of the selected sector SPDR ETFs are abbreviated. The full name of the utilities fund, for example, is Utilities Select Sector SPDR ETF.
Source: tree of wisdom
Tobin outlines five possible uses for cash: stimulating organic growth, acquiring another company, distributing a dividend, buying back own stock, or reducing debt. In calculating a company’s shareholder return, Tobin includes debt repayment as well as dividends and buybacks, while other investors focus on the latter two.
A good capital allocation record, Tobin says, typically includes making smart investments that help grow profits. “And when you run out of ideas, you have to return the money to the owners of the business,” including through buyouts, share buybacks or debt reduction.
When it comes to dividend yield, higher yield is better than lower yield, up to a point. The higher a dividend yield, say between 4% and 5%, the more likely it is to be reduced or suspended, although each case is different and requires its own due diligence.
A shareholder return, however, does not always provide the quick snapshot that a dividend yield can. That’s partly because the size of a company’s share buybacks often fluctuates from quarter to quarter and can be inconsistent with dividend payouts.
“There’s a lot of backlash if you cut your dividend,” Tobin says. But “the commitment to buy back shares is unlimited and variable”.
Take into account
WisdomTree American Value
exchange-traded fund (WTV), which has a bias toward value. As of Feb. 28, its dividend yield was around 1.8%, which isn’t very attractive but still higher than the recent S&P 500 yield of around 1.4%. But the ETF’s net redemption yield was almost 7%. The lower the stock price, the higher the redemption yield, and vice versa. The same goes for a dividend yield.
This 8% net redemption yield “shows that on average these companies are buying back stocks that are generally cheap,” says Jeremy Schwartz, global chief investment officer at
WisdomTree. “It’s expressing the belief that the company is undervalued.”
About three-quarters of the WisdomTree Value ETF’s shareholder return comes from redemptions, not dividends. “Shareholder return is a very strong measure of value,” says Schwartz.
For investors who find stocks with high redemption yields attractive, they need to make sure they are comfortable making such a big bet on value stocks. It’s not exactly the same as a pure play on dividend yields, although higher yielding stocks tend to have a value bias as well.
As of March 22, the WisdomTree Value ETF’s largest sector weighting was financials at 29%, followed by consumer discretionary (13.4%), healthcare (11.8%) and industrials (10.8%). %). Of the 11 sectors in the S&P 500, financials and energy were the only two in positive territory this year, through the March 22 close.
As shown in the attached table, the composition of dividends and share buybacks varies considerably from one sector to another. Financials, for example, recently posted a net redemption yield of around 3.5%, the highest among the 11
Sector ETFs, according to Wisdom Tree. Energy had the highest dividend yield at 3.22%, but its net redemption yield of 0.74% was one of the lowest.
Another consideration for shareholder returns is that they can help explain some of the disparities in dividend yields between regions. The MSCI Europe index recently posted a return of 2.82%, well above the 1.37% of the S&P 500. One of the main reasons is that many European companies have preferred dividends to buybacks. US companies, on the other hand, turned to buyouts, which boosted shareholder returns. In the fourth quarter alone, buybacks from S&P 500 companies totaled about $270 billion, compared to $134 billion for dividend payouts, according to the S&P Dow Jones Indices.
Some international companies are beginning to diversify their capital return policies. German chemical company
BASF (BAS.Germany), for example, paid out about 3 billion euros (about $3.3 billion) in dividends last year, yielding about a 5% year-end yield, Tobin points out. However, the company announced in January that it was launching a share buyback program of up to 3 billion euros for this year and next, which would likely increase its return to shareholders.
closer to home,
Apple (AAPL) generated about $93 billion in free cash flow in its most recent fiscal year that ended in September, according to FactSet. That covered most of its dividends ($14.5 billion) and buybacks of its common stock (nearly $86 billion). The stock only yields 0.5%, although its shareholder return last year was between 3% and 4% thanks to buybacks.
Tobin says he accepts Apple’s low dividend yield because the company is buying back its stock, “distributing nearly all of its cash flow to the owners of the business,” and is on a good growth path. “It’s more holistic than focusing narrowly on dividend yield.” he adds.
Write to Lawrence C. Strauss at [email protected]