Value investors often look closely at dividend policies as a
part of total return on an investment and an indicator of the
financial strength and prospects for a company.
But dividends aren't the only way that companies return money
to investors. Many companies spend as much or more on stock
buybacks on the open market. Such buybacks can reduce shares
outstanding and increase earnings per share, even when a company
isn't increasing its net income.
Goldman Sachs (
) researchers recently released a report highlighting companies
that combine dividend payments with big buyback programs. By
summing up the impact of the dividend yield and the EPS accretion
due to buybacks, Goldman Sachs came up with a number that
reflects companies' total direct spending on investors.
Four insurance companies occupied spots high on the list: No.
10. Validus Holdings Ltd. (
) with a combination of yield and accretion totaling 8.5%; No. 4,
) 11.9%; No. 2, Travelers Inc. (
) with 17.5% and No. 1, Assurant Inc. (
) with a total of 21.1%.
Validus, based in Pembroke, Bermuda, is a large reinsurer and
specialty insurer. Ameriprise, which was spun out of American
Express in 2005 is a wealth management and mutual fund operator,
but it has a significant home and life insurance business as well
as an annuities business. Travelers is a diverse consumer and
business insurance firm and Assurant owns a number of specialty
In each of these companies the buybacks played a much bigger
. Indeed, their yields are relatively puny.
VR Dividend Yield
These payouts remain small even though the companies have
steadily raised dividend rates since the end of 2009.
But their buyback programs, which generally peak in the fourth
calendar quarter, also represent a return to investors, and
according to the Goldman Sachs report, they often have a much
bigger impact on the stock due to reductions in shares
VR Stock Buybacks
VR Shares Outstanding
Book value per share rises more swiftly, as shares are
VR Book Value Per Share
Many companies tout their buyback programs as a way to return
capital to shareholders. Buybacks give companies flexibility to
use cash as needed for acquisitions or to hedge against business
downturns. Quarterly dividend levels typically are set with a
view that the company will continue paying the same or more in
the future. A dividend cut or omission is a black mark in
But buyback programs have critics as well. Some investors
complain that the buybacks go to investors who are selling the
stock, not loyal shareholders. Continuing shareholders would
presumably prefer higher dividends. Analysts also note that
buyback programs at some companies barely offset new shares that
are issued under stock option plans. In those cases, the shares
bought back merely balance the dilution that occurs when
executives and other employees get big stock awards.
The combination of buybacks and dividend growth appears to
work in boosting shareholder value. Three of the four insurers
that the Goldman Sachs report surfaced have outpaced the market
during the past 12 months, as seen in a
And investors can anticipate that these companies will
continue to buy back shares. Validus, which spent $204 million
buying back shares in a Dutch auction last June, still had $166.4
million left in its stock repurchase program after the
repurchase. Ameriprise added $2 billion to its stock repurchase
program in June, 2011. As of June 30, 2012, Travelers had $2.9
billion authorized for repurchases.
And last May, Assurant added $600 million to the $170 million
that remained from existing repurchase authorizations. At the
time, Robert B. Pollock, Assurant's president and chief executive
officer, said: "Assurant's disciplined share repurchase strategy
illustrates our commitment to deliver significant value to our
shareholders, resulting in the purchase of approximately 43
percent of the company's common shares outstanding during the
past eight years."
Moreover, all these companies appear to have ample capacity to
boost their dividends, with current payout ratios well under
TRV Cash Div. Payout Ratio TTM
Looking for companies that return money to shareholders can
signal solid investment opportunities.
Bill Bulkeley is an editor for the
YCharts Pro Investor Service
which includes professional