Credit: Years ago, I wrote a newsletter called Total Yield whose core purpose was to find companies returning gobs of cash to stockholders through dividends and stock buybacks. Years of research suggests that companies returning capital through both channels deliver far superior returns to those that just utilize one (or none).
Back-tested data going back to 1982 shows a clear-cut edge for these companies over the S&P 500, including an average outperformance of nine percentage points during the bear markets of 2002 and 2008.
Of course, we are far more interested in the dividend side of the equation in my premium newsletter, High-Yield Investing . But that doesn't mean I ignore the potential benefits of share repurchase activity. Even if I don't specifically call attention to it, I monitor buyback expenditures among all my portfolio holdings and potential candidates.
The corporate finance whizzes at most major U.S. companies certainly understand the potential shareholder value creation in these investments. And they are taking full advantage. While the average dividend yield in the S&P 500 is 2%, the average buyback yield (gross buyback dollars as a percentage of market cap) has been running between 3% and 4%.
That means for every dollar spent on dividends, companies have been plowing up to $2 into share repurchases.
According to market research firm TrimTabs, U.S. companies approved $433 billion in new share buyback announcements last quarter. In the month of June alone, there were 31 companies that each pledged to invest $1 billion or more.
Buyback authorizations are on pace to total more than $1 trillion this year, shattering the previous record of $809 million from 2007.
I don't want to get into the math (we can save that for another day). In the simplest terms, buybacks are a tax-advantaged way of returning cash to stockholders. These repurchases eliminate shares, which gives the remaining shareholders a larger proportional claim on the underlying assets and cash flows of the business. All things equal, this tactic makes the remaining shares more valuable.
Retire 25% of the outstanding shares (which some aggressive repurchasers have done) and you automatically increase earnings per share by 33%, without a penny of additional net income.
Of course, the benefits only materialize when shares are being repurchased at a discount to what they're really worth. If the company overpays, then shareholder value is destroyed, not created. But when done at the right price, this can be a powerful way to deploy capital.
Just ask Warren Buffett, an outspoken advocate. As he explains, "When stock can be bought below a business's value, it is probably the best use of cash. If management wishes to further intensify our ownership by repurchasing shares, we applaud."
That's a big reason why his holding company Berkshire Hathaway (NYSE: BRK-B ) has accumulated a massive stake in Apple (Nasdaq: AAPL ). The iPhone maker invested $44 billion in buybacks in the first two quarters of 2018, reducing its share count by 300 million over the past year. It's no coincidence that the market has since driven AAPL shares to a record $229.
It stands to reason that the more cash a company commits to dividend distributions, the less available for share repurchases. So those with elevated yields above 8% rarely make meaningful contributions to buybacks. But there are always exceptions.
In the table below, I've compiled a list of companies with buyback yields of up to 14.7% in addition to generous dividend yields of four to five times the market average.
* All data provided by Bloomberg
As always, this screen is simply meant to uncover potential candidates that might be worthy of a closer look. These stocks haven't been fully researched and shouldn't necessarily be considered portfolio recommendations.
Having spent several years investing in companies diligently repurchasing shares, I have seen first-hand the benefits that accrue over time to stockholders. But that doesn't mean you can invest blindly in any company that is throwing money into buybacks. Some simply use this tactic to mask sluggish sales and artificially inflate earnings. That's like a chef using salt to cover up bland food.
That being said, this screen is an excellent starting point. Unless buybacks are financed with debt, then we know the company is internally generating a considerable amount of surplus cash (it wouldn't be returning so much otherwise).
Furthermore, buybacks are completely elective. So if cash flows decline for any reason, they would be cut first, before dividends. That makes them something of a safety cushion for income investors.
You're welcome to do your own research on the stocks in this list, but as always, if I find a real gem within these screens, my High-Yield Investing subscribers will be the first to hear about it.
If you'd like to join us in our search for the best high yields the market has to offer, then I want to invite you to learn more about High-Yield Investing . You don't have to settle for the paltry yields offered by most stocks. The high yields are still out there. You just have to know where to look -- and my staff and I are here to help you along. To start earning more income now, check out this report .
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
