Stocks that share with their shareholders
Dividends are down, and so are share buybacks, says this U.S. advisory, so it’s crucial to seek out stocks with real shareholder value.
It’s no secret that dividends aren’t as plentiful as they used to be.
The one-two punch of the financial crisis and market crash was bound to send a number of companies scurrying to cut dividends or even toss them overboard altogether.
It has also thrown a crimp into share buyback programs.
But the problem may run even deeper than many suspect. One leading U.S. advisory has a formula for calculating shareholder value.
And that formula shows that on the whole companies are being “mighty stingy.” And something else has happened. Many companies now seem to think it’s better to buy back shares than to pay dividends.
Dow Theory Forecasts gives us facts and figures on how the corporate world is treating shareholders and recommends several stocks that are still determined to keep their shareholders happy.
How parsimonious
Dividends had been on the upswing for 17 consecutive years before the December 2008 quarter, says this advisory. This year, cash dividends on the S&P 500 Index should fall by about 23 per cent a share.
“But that decline actually understates how parsimonious companies have been with shareholders,” adds the advisory.
Stock repurchases have fallen off at an even greater rate than cash dividends.
In short, this is a very good time to gauge just how generous we can expect corporations to be.
Shareholder yield
There is a measuring stick for corporate generosity. It’s called shareholder yield, and it incorporates both dividends and share buybacks.
The advisory illustrates with a stock that resides on its list of Focus Buys (best buys for the next 12 months), IBM (NYSE-IBM).
Over the last 12 months, this computing giant paid out $2.8 billion in dividends and repurchased $5.1 billion worth of shares. “Divide the sum of dividends and buybacks by the stock market value of $151.8 billion,” says the advisory, “and you get a shareholder yield of 4.9 per cent.”
Buybacks more popular
Based on this statistic, U.S. companies have been exceptionally stingy. On the broad S&P 1500 Index (which covers small-, mid- and large caps), the 1,453 firms with three years’ history were down 7.5 per cent in dividend payments over the last 12 months.
Share buybacks actually turned negative in those 12 months. Companies issued $116 billion more in new shares than they repurchased. In the previous 12 months, share buybacks had outpaced new issues by $337 billion.
Still, more than half the companies on the index bought back more shares than they issued. In fact, buybacks have become more popular than dividends. Here’s why.
For appearances’ sake
“Once a company begins paying a dividend, it can be risky to cut back,” this advisory points out. Investors who buy a stock that pays income naturally get upset when it shrinks, or disappears. Cutting back on repurchases attracts less attention and tends to arouse less ill will.
Sometimes companies refuse to pay dividends for appearances’ sake. It may hurt their reputation as “growth” stocks. This stigma has receded in recent years, says the advisory, as more tech stocks, for instance, have started paying dividends.
Buybacks also goose the value of shares. When a firm with 100 million shares outstanding earns $100 million, the value is $1.00 a share. When it buys back 10 million of those shares, the value rises to $1.11 per share.
Not least, there are stock options. If executives want to boost the value of their stocks options (and when don’t they?) they will prefer share buybacks, which tend to raise the share price, while dividends do not.
Standing out
Since both dividends and share buybacks have shown a net decline in this uncertain financial climate, the companies with high shareholder value really stand out, says Dow Theory Forecasts. Here are three.
Accenture (NYSE-CAN), the large consulting firm, announced a $4 billion share repurchase in October and raised the annual dividend by 50 per cent. While revenue has fallen, cash flow has been rising and debt is negligible. The public sector is providing some growth opportunities for the company, and the private sector is slowly beginning to thaw out.
Accenture’ s shareholder yield is 7.8 per cent. It’s a buy.
Exxon Mobil (NYSE-XOM) has returned over $38 billion to shareholders in buybacks and dividends in the past 12 months. Lower energy prices cut into profits, but this behemoth keeps piling up cash. And while others in the industry cut back, it is ploughing $29 billion into capital projects this year.
The shareholder yield is an eye-catching 10.6 per cent. This is a Focus Buy.
Stryker (NYSE-SYK), a specialist in medical devices, saw its sales fall off this year as hospitals tightened budgets and elective surgeries were postponed. Nonetheless, it has repurchased $970 million in shares in the past 12 months and raised its dividend for the 14th consecutive year.
With a healthy 6 per cent shareholder yield, Stryker is a buy.
Canadian investors know that this parsimonious trend among stocks is scarcely restricted to the U.S. But the solution is clear.
Look for stocks that are willing to share the wealth even when there’s less wealth to go around.
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