Leaning on dividend-paying stocks has become the go-to move for income investors losing patience with inflation-lagging bond yields. The 2.5% yield of dividend-payers in the S&P 500 stock index is a half a percentage point better than the interest payout on a 10-year Treasury note.
Even better is that some solid blue chips with dividend yields in the 2.5%-3.5% range are actually delivering yields of 4% or more once you add in the impact of share buybacks.
Share repurchases are the “other” way that companies return capital to shareholders. The payoff is that by reducing the number of outstanding shares, each remaining share owns a bit more of the company. That said buybacks have a bit of a checkered reputation. Studies have shown that some management teams have the habit of buying back when their stock price is high. Chalk that up to bad timing, or perhaps a desire to boost earnings-per-share performance to trigger fat compensation bonuses, as Warren Buffett has noted.
But when a company commits to a buyback program when a stock is trading at a compelling valuation -- and when that buyback is spread over time to avoid poor timing -- it can indeed be a solid move for shareholders.
Platinum subscribers can chart the impact of buybacks using the Shares Outstanding metric that is at the very bottom of the Balance Sheet category in the Chart Creator.
Adding the percentage reduction in shares outstanding to dividend yield makes some compelling blue chips even more compelling.
Exxon-Mobil’s (XOM) current dividend yield of 2.6% is solid, if not eye-popping. But the company has also been aggressively buying back shares for the past five years. To compute a current total yield I set the Shares Outstanding metric timeframe to one year, checked the “display chart as percent change” and voila:
Add that 2.06% decline in shares outstanding to the 2.6% dividend yield and suddenly XOM is transformed from a nice yield story to a rock star over the past year: A 4.66% total yield for a stock that trades at a below 10 PE ratio. A nice kicker is that Exxon-Mobil consistently increases its dividend payout; over the past five years the annualized rate is more than 7%.
Coca-Cola (KO) has a 3.1% dividend yield, but adding in the 1% reduction in shares outstanding over the past year pushes its return of capital up to a nice 4.1%. And there should be more of that coming. Last fall Coca-Cola announced plans to repurchase up to 500 million shares, which would reduce its shares outstanding by more than 10%. (There is no given time frame for the repurchases.) Another “return” bonus is Coca-Cola’s long history of boosting its dividend payouts; that growth is built in inflation protection that no bond can deliver:
Intel (INTC) already delivers a fat 4.4% dividend yield, and certainly isn’t pricey, trading at a PE ratio that is 30% below the market average. Now let’s take a look at its change in shares outstanding:
That pushes Intel’s total yield to 5%. That’s near the payout from junk bonds these days … yet Intel is a global market behemoth with a rock solid balance sheet. Yep, Intel has to figure out how to grab more market share in energy efficient chips for tablets and smartphones -- and it's investing big time to do just that. If you happen to lean toward the conclusion that Intel will indeed figure things out, you can buy today and get paid a total yield of 5% to wait, assuming Intel keeps up its repurchase pace.
3M (MMM) could be an interesting total yield story in the coming years. It recently authorized a $7.5 billion repurchase plan. At 3M’s current share price that would amount to a reduction in shares outstanding of more than 10%.
3M hasn’t set a timeframe for the repurchase, and indeed plenty of companies don’t follow through on their repurchase plans. But just back-of-the-enveloping things if 3M were to take three years for this repurchase plan, that would be an average share reduction of 3% or so. The current dividend yield is 2.5%, so clearly that would make for a pretty nice total yield. It’s worth noting however that 3M announced the plan when its PE ratio had climbed to 16.33; from a value standpoint it would have been nice if the plan kicked in a year earlier when the PE was 11% lower.
And while 3M is a dividend aristocrat -- raising its payout for at least 25 consecutive years -- the growth has been on the slowish side, averaging 4% over the past 5 years. The pace has picked up recently, with the 12-month dividend growth rate pushing 7%. If the repurchase plan materializes, investors could have a nice triple play of a competitive current yield, solid dividend growth and a strong total yield fueled by a reduction in outstanding shares.
Carla Fried, a senior contributing editor at ycharts.com, has covered investing for more than 25 years. Her work appears in The New York Times, Bloomberg.com and Money Magazine. She can be reached at firstname.lastname@example.org.
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