2 Canadian Stocks With High Shareholder Yield

Shareholder yield encompasses the total financial benefits that shareholders derive from a company, including cash dividends, net stock repurchases and debt reduction. William Priest coined the term to encapsulate the diverse manners in which dividends can be dispensed to stakeholders of publicly-traded enterprises, as he discussed in a Forbes interview.

He delineated five potential applications for a company's free cash flow:

1. Distributing cash dividends.
2. Repurchasing company stock.
3. Reducing outstanding debt.
4. Reinvesting in organizational growth.
5. Undertaking acquisitions.

Among these, Priest emphasized that the first three, issuing cash dividends, conducting stock buybacks and diminishing debt, all fundamentally constitute returns to investors, with equivalent effects on shareholders. He called this shareholder yield.

A higher shareholder yield is consistently preferred, as it signifies the company is enhancing value for shareholders through a blend of cash dividends, stock repurchases and debt repayment. All three methods, as Priest highlighted, represent mechanisms through which a company can allocate cash to its shareholders. While dividends benefit the shareholders directly, share repurchases and debt paydown benefit shareholders indirectly by increasing their proportiononate ownership of the company.

Given the rise in prominence of share buybacks vis-à-vis cash dividends as a mechanism for channeling funds to shareholders, the potency of shareholder yield arises from its inclusive computation of both share repurchases and cash dividends. Thus, it stands as a popular substitute for traditional dividend yield measurements.

Focusing on shareholder yields, which includes debt repayment, helps investors avoid companies that may be paying dividends or buying back stock, but taking on debt. While it may sometimes make sense for a company to take on debt to do these things (especially when the cost of debt is much lower than the cost of equity), investors understand that debt increases the risk to the company.

Consistently high shareholder returns also indicate the company's management is shareholder-friendly and is working hard to look after their welfare.

Two Canadian companies with high shareholder yields which I have come across recently are presented below.

Parex Resources

Parex Resources Inc. (TSX:PXT, Financial) is actively involved in the exploration, advancement and extraction of crude oil. Employing expertise honed in the Western Canada Sedimentary Basin, the company extends its technological proficiency to South American basins possessing substantial untapped oil resources. With a primary focus on Colombia, the company conducts its operations by remitting royalties or taxes to the local government. Leveraging the collaboration of a proficient team of geologists and geophysicists, coupled with cutting-edge technologies like 3D seismic surveying, Parex steers its exploration endeavors. The resultant oil production finds its market among a select group of participants across South and North America.

Parex has a shareholder yield of 9.42% currently, but has maintained a high shareholder yield since 2019, so this is no flash in the plan. The company is in superb shape financially, as evidenced by its high GF Score.

The GF Score is a performance ranking system developed by GuruFocus using five aspects of valuation (growth, profitability, financial strength, value and momentum), which has been found to be closely correlated to the long-term performances of stocks by back-testing from 2006 to 2021.

Parex pays a solid dividend yield of 5.05% with a very low payout ratio of 19%.

The company has been buying back stock for the last several years with a three-year buyback ratio of 8.7%. The share buyback ratio is calculated as the difference between shares outstanding (end of period in previous year) and the current year's end of period shares outstanding, divided by shares outstanding (end of period) for the previous year.

Parex appears to be firing on all cylinders as the company has virtually no debt. The only caution is that the company is trading at such a value price that it has triggered a "possible value trap" warning from GuruFocus. In this case, I am ignoring the warning.

New Gold

New Gold Inc. (TSX:NGD, Financial) is actively engaged in the progression and management of intermediate mining ventures. The company owns two key holdings: the Rainy River Mine and the New Afton Mine, both situated in Canada. Additionally, the company holds rights over the Cerro San Pedro Mine in Mexico. Revenue generation for the company arises from the trade of gold, copper and silver to a diverse range of financial institutions involved in precious metal trading, along with refineries.

The company has a current shareholder yield of 6.49% and has maintained a high shareholder yield since 2019.

Unlike Parex, New Gold's GF Score is low, so the risk associated with the company is higher, but, for reasons explained below, this is less than it appears.

While the company pays no dividend nor bought back stock, it has been reducing its debt ferociously. The company has reduced its debt by 58% since 2017 through both operating cash flow and asset sales. Debt reduction benefits the shareholders as it increases the equity portion of the capita structure. Equity is what shareholders own.

The company has been producing solid cash flow from operations and investing it in not only reducing debt, but back into capital expenditures.

The valuation chart shows the company is selling for below tangible book value, which sets a very conservative value for the company. Tangible book value is calculated as assets minus liabilities minus intangible assets. Tangible book value per share is important because it shows the value of a company's net assets minus its intangible assets on a per-share basis. Intangible assets are important, but they are not physical assets that can be readily sold if the company gets into trouble.

Conclusion

Shareholder yield goes beyond dividend yield and also considers stock buybacks and debt paydowns. All three metrics are putting cash back in shareholders' pockets, though the last two do so indirectly. The advantage is that, unlike dividends, no tax is payable by the shareholder. Thus, shareholder yield is a useful metric to consider while evaluating stocks. Of the two stocks suggested here, Parex Resources looks like a solid pick with a fortress balance sheet and gushing free cash flow. New Gold is a speculative pick as it is not free cash flow positive but its very cheap selling below tangible book value, so risk is limited.