I'm going to let you in on a secret. I'd even say it's the best kept secret in the stock market.
Here it is:
Investors who are able to acquire securities that offer a good yield in dividend while being engaged in a program of share buyback wise, are virtually guaranteed to outperform the market by a considerable margin.
In other words, your financial future could lie in companies that offer both a good dividend and a good program of share buybacks when they consider that their stock market title is undervalued.
More and more companies are choosing to reward their shareholders by buying back a portion of their shares on the stock market. By doing so, they allow the remaining shares to increase in value on the market, because there is a higher profit per share that is declared, and shareholders pay less tax than if they received dividends only.
However, some caveats are in order. Business leaders are undoubtedly in the best position to assess whether their stock price is valued correctly. However, IPO programs share buybacks are like insider trading on a large scale. The big difference is that unlike insider trading, which is done by each director of the company individually, share buybacks are decided as a group by the company's board of directors.
It is sometimes difficult to interpret a program of share buybacksSometimes you have to expect false news or questionable intentions from leaders.
Sometimes a company announces with great fanfare a program share buyback, claiming that its stock is undervalued, then changes its mind along the way. It even happens that on occasion, the announcement of a program of share buyback only serves in fact to give shares to employees to improve their working conditions.
The one and only method to verify that the share buybacks are put to good use, consists of examining the company's financial reports in order to verify that the number of shares outstanding is really decreasing, from one financial year to the next.
In recent years, a new financial ratio has been increasingly used to verify and account for the share of profits that a company returns to its shareholders. This is the "Shareholder yield» which could be translated as “Shareholder Return”.
THE Shareholder yield corresponds to the result of adding the yield in dividend with the percentage of its shares that a company has bought back on the stock market during the last 12 months. So, a company that pays you 2% of return in dividend and which has bought back 5% of its outstanding shares over the last year, gives you a shareholder return of 7%. This, in my opinion, is a ratio that allows you to isolate companies for which shareholder enrichment is essential.
So, over the period 1984-2004, an investor who bought the 10 best S&P 500 stocks Shareholder yield, and who would have renewed this basket of 10 securities once a year to respect this selection criterion, would have obtained an annualized return of 22.6% compared to 11.7% for the S&P 500, a capital gain of 10.9%. A result that would place him alongside the world's leading investors.
Now you understand why such a vein remains a secret, or almost...
Martin Raymond, for the blog investiter-a-la-bourse.com
Discover more from dividendes
Subscribe to get the latest posts sent to your email.
Français 
English 
Italiano 
Deutsch 
Español 
Português
Thanks Martin for this interesting article,
What is the best screener to list companies that are doing
to these share buybacks in the interest of the individual shareholder,,,,, ??
Hello Guyem,
The shareholder yield ratio is not widely disseminated on financial sites on the web. For my part, I calculate it personally for each of the securities in which I am interested.
Martin
All very theoretical...
Unlike dividends that end up in the shareholder's pockets, share buybacks are only a theoretical return. The big winners from share buybacks are the managers who have a bonus on the EPS (earnings per share), because the reduction in the number of shares in circulation makes it possible to increase the income per share....it is still necessary that the shares are destroyed and not just kept in cash on the balance sheet...for management compensation for example.
In addition, a company may very well issue shares some time after the buyout. This happens sometimes.
Dear Birdienumnum,
That's why I mention it in the article. Indeed, you always have to be on the lookout because for some managers, share buybacks are fool's traps that ultimately only serve their personal interests.
One must always ensure that the shares repurchased are cancelled and that the number of shares outstanding actually decreases from one financial year to the next. Otherwise, all this is just an ineffective mirage.
There is nothing theoretical about it Birdienumnum.
As a co-owner of the company, which you are in fact as a shareholder, you hold a stake (in % of the capital).
With fewer shares on the market, your stake increases.
To illustrate, if you divide a pie into 16 or 8 you will quickly realize that the slice of pie will not take up quite the same space in
your plate.
In the future you will have a larger proportion of the profits, which is always appreciable, and it will cost the company less to pay a dividend...normal there are fewer shares in circulation.
In addition, the share buyback is tax neutral, which is quite attractive from a long-term perspective.
I much prefer a company to buy back its shares rather than embark on expensive and risky diversification programs, overpaid acquisitions or other such nonsense.
The only caveat, of course, is at what valuation level the company buys back shares. History is littered with examples of buybacks that destroy shareholder value.
Another major advantage is that it gives the company flexibility in capital allocation. As much as it will always be frowned upon by Mr. Market if a company lowers or cuts its dividend, this will not pose any problem for a share buyback program.
Companies that use both systems can thus juggle as they wish depending on the circumstances of the moment.
I'll let you appreciate the result of this backtest on the question, the results speak for themselves.
I highly encourage you to read "The Outsiders", you will probably change your mind. This book is a must-read.
In particular, he paints a portrait of exceptional managers such as Henry Singleton, who bought 90% of Teledyne shares. Shareholders who trusted him can make a statue of him in their garden.
Same with JohnMalone & TCI/Liberty, Bill Stiritz &, Bill Anders & Purina.
That said, we must of course be vigilant on the two points you raise: actual cancellation of shares and the objective of the buyback program.
By the way, thanks Martin for the article ;).
Good morning !
When the share buyback takes place because the company no longer knows what to do with its abundant liquidity, that's a good sign!
If it's just to please the shareholders, be careful...
Martin,
Really interesting and common sense article. I will start evaluating some companies by following your shareholder yield.
What do you think about PM (Philip Morris) which has a very high share buyback program and has a high dividend.
Good evening, RA50
Unfortunately RA50, Philip Morris is not part of my universe of stocks to follow. The sector in which the company operates (tobacco) is, in my humble opinion, a sector in decline, although the arrival of the electronic cigarette will perhaps help but for the moment its impact on the sales of the company is much too minimal to be used as a catalyst for taking a position in the company.
A solid continuity of growth over several years must be considered to allow the company to continue to pay a good dividend and to proceed with the repurchase of shares on the market. For me, given my limited knowledge of the business sector, I prefer to stay on the sidelines.
Martin
Hi Martin
Thank you for this interesting article. I don't quite agree about cigarettes, they are going through a period of crisis, like junk food, but I think they will bounce back. Let's not forget that this is a sector that generates significant margins and therefore allows for paying juicy dividends. People, especially when things are going badly, have an unfortunate tendency to fall back on tobacco, alcohol and food. Human beings are made like that, and not all the awareness campaigns will change anything. I'm not saying it's good, it's even unfortunate in some way, but that's how it is. And then, well, we can't always be perfect either... a little vice is good too.
Hi Jerome! I don't know about you in Europe but here in Canada, cigarette smoking is clearly on the decline.
Unlike you, I think that anti-smoking campaigns are doing their job by reducing the number of smokers over the years, but several companies have succeeded in history in generating growth in a declining market.
So, it's not a waste of time.
Martin
Europe is a bit of a developing country, to refer to Michel's comment 😉
@Jerome: I don't think that cigarettes are experiencing a crisis. There are plenty of developing countries that are demanding cigarettes 🙂!
Otherwise, 7% is a return, but why not prefer to take 20% of PV, or years of dividends?
In my opinion, there are still many sectors other than cigarette manufacturers that should be worried about their future.
The world population is growing and health requirements are not at the same level in the West (North America + Europe) and in emerging countries.
On a trip to China I was amazed at the number of people who smoked.
Very good point Etienne, regarding emerging countries and the number of smokers there, it deserves further reflection on my part.
THANKS!
Martin
Why absolutely want a growing and “hyped” sector?
Tobacco is taboo, many investors do not want to touch cigarette companies, for obvious moral reasons...so much the better! No bubble valuations!
A sector in decline…not sure, but after all: so much the better if it is the case!
Indeed: what is the risk of seeing a new entrant arrive in a sector with low or even negative growth, in which an oligopoly of a few huge, highly profitable companies reigns? The business is just perfect: we sell the skin of the ass what costs a pittance to produce, we can do without research and development, advertising, the customer is "tied" to the product, and no new competitor to call all that into question! And if the sector were to really suffer...we would undoubtedly see a consolidation of the sector!
it's clear !
and it pays generous dividends
see my portfolio “Drinking & Smoking Dividends” in the members section
http://www.dividendes.ch/smoking-drinking-dividends/
Totally agree Yoshi!
Many companies operate in sectors that are not normally "reputed" to be attractive for their dividends.
For example Genuine Parts (an automotive supplier) or Nucor (steel industry).
In France, Touax (freight transport) has been paying a dividend since 1906.
Many regional banks in the US or in France (regional agricultural credit unions) are also very good candidates.
Yes, I like Touax, strong positioning in a "boring" activity, a management with interests aligned with those of the shareholders, and for good reason they are managing partners, with unlimited liability (limited partnership, like Rubis...), so we can say that they risk their shirts with each decision!
The only drawbacks: it is a fairly volatile micro cap, and the dividends are quite fluctuating...
To return to shareholder yield, the "real rental yield" of a company is not the one it redistributes in the form of dividends, but the one it earns! A bit like a rental property portfolio that would be held via a corporate form (SCI, etc.), it doesn't matter whether the owner uses the money from the rent paid to buy new properties, to repay part of the debt, or to pay it back to himself in the form of dividends, what counts... it's good that a maximum of properties are rented, and that the tenants pay their rent on time!
Good morning,
When we look at the evolution of the historical price curve of Touax, the price has been falling since 2011 while all the shares are rising!
There are better yield stocks.
Michel,
Touax was only mentioned to illustrate the sustainability of the dividend, nothing else.
The dividend has the advantage of being a “visible” means of remunerating the shareholder.
A company has different ways to use its cash wisely, three of which are "dividends":
▪the dividend, of course
▪debt reduction
▪share buyback (if it is carried out when the company is discounted…)
The result of each of these solutions is identical for the shareholder, but for an income objective the dividend will be preferred, not to mention that debt reduction and share buybacks cannot/must be done regularly.