The Power of Shareholder Yield

Shareholder Yield is a composite metric which measures potential shareholder returns. Many investors are not terribly familiar with this metric, preferring to pay attention to dividends alone. It’s an esoteric return metric which is available in GuruFocus, but it’s a bit hidden and takes digging into. It can be reached via the definitions tab on the GuruFocus stock summary page and then searching for Shareholder Yield. It is also available in the All-in-One screener and we can screen for it.

Shareholder Yield % is how much money shareholders receive from a company that is in the form of cash dividends, net stock repurchases, and debt reduction. The term was coined by William W. Priest of Epoch Investment Partners in a paper in 2005 entitled, The Case for Shareholder Yield as a Dominant Driver of Future Equity Returns. William Priest explained that "shareholder yield is a term that we came up with to reflect the various ways dividends can be paid to owners of a business in a publicly-traded company." Shareholder Yield is obtained simply by adding the Dividend Yield to the Buyback Yield and the Net Debt Paydown Yield. For example, the current Shareholder Yield of oil and gas pipeline company Kinder Morgan (KMI, Financial) is 10.62%, which is calculated as follows:

Dividend Yield

Most investors are of course familiar with the Dividend Yield. It’s the most obvious form of shareholder return, a measure of the cold hard cash the company puts in investors' pockets. Dividends are a portion of a company's profits that are paid to investors (i.e. shareholders) on a regular basis. This may provide a source of income if the investor does not choose to reinvest the dividends. Dividend income can help offset declines in share prices. The growth potential of dividend income can help minimize the impact of inflation. The annualized dividend divided by the price of the stock gives us the Dividend Yield. A problem with dividends is that they are taxed unless held in a tax-free or tax-deferred account.

Buyback Yield

The second component of Shareholder Yield is Buyback Yield. Buyback yield is a measure of how much a company spends on repurchasing its own shares relative to its market capitalization. It is calculated by dividing the change in the number of shares outstanding or the cash flow from stock repurchased by the market capitalization. A high buyback yield may indicate that a company's management believes it is undervalued, though that is not always the case.

Stock buybacks have drawn criticism from politicians who believe companies should use their cash in other ways to boost growth in the long term which would benefit the economy, such as employee benefits, research and development and capital expenditures. Some say buybacks often provide an artificial boost to earnings per share growth, and when companies stop doing that, accomplishing that goal becomes more challenging. Some also say that buybacks are made to benefit executives as it increases the value of their stock options and share-based compensation, which leads to accusation of conflict of interests. This criticism makes sense if a company is buying back stock which is expensive to begin with and taking on debt to buy the stock. This is usually horrible for the company's shareholders in the long run, but is usually great for the insider executive in the short term.

An example of improper buybacks is IBM (IBM, Financial) which for years bought back stock while taking on debt, but the stock never went up consistently. Management went on to incinerate billions of dollars over the years in value-destroying buybacks. Paypal (PYPL, Financial) was another company which went on to destroy billions of dollars by buying back expensive stock during the pandemic when its stock was in a bubble, while at the same time handing out large amount of stock-based compensation to insiders. Ultimately, it’s the Board of Directors who authorizes buybacks, and a diffident or incompetent board which does not understand the impact of stock buybacks can lead a company astray. Sadly this appears to be much more common than I had previously thought. Executives constantly pressure and influence the Board to authorize buybacks to inflate their own stock options.

Warren Buffett (Trades, Portfolio) believes buybacks are beneficial to shareholders as they provide a lift to per-share intrinsic value, as long as shares are acquired when the intrinsic value exceeds the price paid for the buyback. Buffett once said, “The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices... Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

Buffett's Berkshire Hathaway (BRK.A, Financial)(BRK.B, Financial) has been buying back stock because Buffett thinks the stock is undervalued. “At Berkshire, we directly increased your interest in our unique collection of businesses by repurchasing 1.2% of the company’s outstanding shares,” Buffett wrote in his most recent letter to shareholders. Of course, the major problem is that most of Boards of Directors do not have genius capital allocator like Buffett or management with unimpeachable character. BRK.B's most recent Shareholder Yield is 1.98% as of March 2023 event though the company pays no dividend.

Another advantage of buybacks is that currently no tax is payable to the government as the return here is non-cash.

Net Debt Paydown Yield

Net Debt Paydown Yield is the change in average of four quarters of company's total debt over a company's market cap. Assuming the total value of a company remains that same, shareholder value is increased as debt is reduced.

Debt can be a good thing if, by taking on debt, the company can use capital for business building activities. It can also sometimes make sense when the cost of debt is very low, and the company can adjust its capital structure to accommodate more debt vs. equity. However, too much debt can easily get the company into trouble, say in an economic downturn or recession, as debt holders have priority over equity holders if the company becomes insolvent (i.e., if it cannot pay back its creditors). Thus debt can become a big risk if it goes beyond a certain point as it can wipe out the shareholders' ownership of the company.

All things being equal, paying back debt helps the company shareholders as it takes away a major component of risk. Companies with a consistent high net debt paydown yield show they are removing a major source of risk to the shareholders and are free to allocate resources to other uses than paying interest on debt. A debt paydown is not immediately accretive to shareholders like dividends, but it is very beneficial in the long run.

While GuruFocus does not report Net Debt Paydown Yield as a standalone metric, it does calculate it as part of the Shareholder Yield, and this can be seen on the Shareholder Yield page.

Consistent shareholder yield over time

While a single year of high shareholder yield is nice, what investors should look for is a consistent pattern of high shareholder yield. For example, let us look at Kinder Morgan's shareholder yield over the last 10 years. We see that the company has maintained a consistently high shareholder yield since 2016. This looks like a company I might want to own as it takes shareholder returns seriously.

Another example would be the generic pharmaceutical company Viatris (VTRS, Financial), which was formerly known as Mylan, which sported a very high shareholder yield as of Dec 2022 (and an even higher 42.3% shareholder yield as of March 2022), but its past patten is very inconsistent as shown below. So Viatris to me is not that attractive for shareholder returns because of lack of consistency. I prefer Kinder Morgan in this respect.

Some other stocks I found while researching this topic, which have consistent Shareholder Yields over many years are Aflac (AFL), Cisco (CSCO), Anheuser-Busch InBev (BUD) and Amdocs (DOX).

Summary

Shareholder yield is a financial metric that gives value investors a more complete picture of how the company is using its cash flow to reward its shareholders. It is the total cash that shareholders receive from a company in the form of cash dividends, net stock repurchases and debt reduction, i.e., everything except capital gains. It is a more holistic approach to increasing returns that has produced better returns than dividend stocks according to back tests conducted by investing thought leader Meb Faber, who is a proponent of this metric. A consistently high shareholder yield is also a signal that management is shareholder friendly. However Shareholder yield should be used with caution in Financial sector businesses such as banks and insurance companies whose total debt may fluctuate wildly due to operating reasons. In that it may be better to ignore the net debt paydown yield and just focus on dividend and buyback yield.