September 30, 2019 BARRON’S 29
INCOMEINVESTING n By Lawrence C. Strauss
Not All Yield Is Equal
Dividend,buybackratioscanrevealcompanies’priorities
A DIVIDEND YIELD CAN OFFER SOME IMPOR-
tantcluesaboutacompanyanditsstock.If
theyield,whichdividesthedividendspaid
out over a 12-month period by the stock
price,is highrelativetoitshistoricalaver-
age, the stock could be a laggard. A low
yield could signal that paying a dividend
isn’t a big priority or that shares have be-
come expensive.
Another way to quickly assess a com-
pany’s capital priorities, however, is the
buybackyield.Itcalculatesthedollarvalue
ofthesharesrepurchasedasapercentage
ofastock’smarketvalue.Ahighyieldindi-
catesthatthecompanyisprobablyrepur-
chasing a lot of shares.
Thesetwoyieldsarebothtiedtoreturn-
ingcapitaltoshareholders,buttheirfocus
is different.
“Buybackssupportstockprices,butdiv-
idends put cash in my pocket and pay my
rent,”saysHowardSilverblatt,seniorindex
analyst at S&P Dow Jones Indices.
Buybacks,intheory,atleast,canlower
the share count and help boost earnings
pershare.Buttheirrealimpactandintent
can be tricky to discern.
“You need to make the distinction be-
tweensharebuybacksthatretirestockina
meaningfulwayandbuybacksthatjustoff-
set the dilution from stock options,” says
DavidKatz,chiefinvestmentofficerofMa-
trixAssetAdvisorsinWhitePlains,N.Y.In
otherwords,somebuybackprogramseffec-
tivelyservetosopupsharesgiventoexec-
utivesandemployeesaspartofcompensa-
tion programs.
It’s also important to pay attention to
thevaluationatwhichsharesarebeingre-
purchased,Katzsays.Buyingbackshares
atbelow12timesearnings,whichiswhere
manybankstockstrade,“tendstobevery
accretive” to earnings, Katz says. “If you
arebuyingbackstockat25timesearnings,
thatgenerallyisnotgoingtobethataccre-
tive over the long term.”
Twoexamplesofcompaniesthatbought
backsharesatattractivevaluations: Home
Depot (ticker:HD)and Apple (AAPL).The
companies,whichalsopaydividends,have
“been big beneficiaries of having major
buybackprogramsaspartoftheircapital-
allocation plan,” says Katz.
Somecompanyexecutivestalk about
dividendsandbuybacksasthoughthey’re
in one bucket.
Jeff Gustavson, vice
presidentofNorthAmeri-
can exploration at Chev-
ron (CVX), said recently
thatthemajoroilfirmex-
pectstoreturn$13billionthisyearviadivi-
dendsandsharerepurchases.Thatequates
toatotalshareholderyieldofabout6%,he
said. The stock’s dividend yield is 3.8%.
Initssecondquarter,Chevronpaidcom-
mon stock dividends of $2.2 billion. That’s
muchhigherthanthe$1billionitspenton
buying back its common shares.
Anotherthingtobeawareofisthatdivi-
dendstendtobestickierthanbuybacks.For
the past 20-plus years, buyback programs
amongS&P500companieshaveebbedand
flowed but have easily surpassed dividend
payments.Buybacks,saysSilverblatt,“are
notseenaspermanentandcanbechanged
quickly.”Butforadividend,hesays,“once
it’spaidandincreased,it’shardtopullback.”
Although preliminary numbers show
thatbuybacksamongthoseS&P500com-
panies slowed to about $165 billion in the
secondquarter,theywerestillwellaheadof
the$118.7billiontotalfordividends,accord-
ing to S&P Dow Jones Indices.
Among sectors, the dividend-versus-
buybackpreferencesarestark.Utilitiesin
theS&P500recentlyhadadividendyield
of 3.18%, third among the 11 sectors and
behind only energy (4.03%) and consumer
staples(3.74%).Thebuybackyieldforutili-
ties,however,wasonly0.44%,thesecond-
lowest sector behind real estate (0.38%).
The highest buyback yield belongs to
thefinancialsat5.04%,followedbytechat
4.9% and industrials at 3.22%.
Thecombinedyield—dividendandbuy-
backs—fortheS&P500wasrecently5.43%,
with its dividend yield a little above 2%.
Thebottomline:Dividendandbuyback
yieldsarebothimportant,butit’scrucialto
analyze them in their proper contexts.
Dividend
Payments,
pageM39
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