Shareholder yield goes beyond just quarterly dividend payouts and includes cash dividends, share buybacks, and debt paydowns as ways to reward shareholders. This broader definition of yield can provide a better indicator of a company’s financial success compared to only looking at dividend yield. Companies like AT&T and American Electric Power have resorted to borrowing money to fund dividends, making the traditional dividend-only yield a less reliable measure of shareholder returns.
The shift from dividends to share buybacks has been happening for decades, with companies finding buybacks to be more tax-efficient. Companies in the S&P 500 index have been buying back shares at a rate higher than paying cash dividends. This change in distribution habits can be seen in companies like PayPal, which has focused on share buybacks since being spun off from eBay in 2015. However, the success of this strategy is not guaranteed, as shown by PayPal’s stock performance fluctuating over the years.
Investors holding onto shares of companies that distribute profits through buybacks can benefit from not having to pay income tax on unrealized gains. A new federal law imposes a 1% tax on buybacks, but this is still less damaging than individual income taxation on dividends. The combination of buybacks and dividends forms the shareholder payout, but this number alone does not provide a complete picture of a company’s financial health. Companies that borrow money to distribute profits, like Sears and Bed Bath & Beyond, can end up facing financial troubles.
A comprehensive yield formula that considers changes in funded debt can offer a more accurate representation of a company’s shareholder yield. This formula takes paydowns as a positive factor in the yield calculation and increases in debt as a negative factor. Large corporations in the YCharts database have a median shareholder yield of 4%, with different companies falling at the extremes of the yield spectrum based on their financial activities over the past year.
A high shareholder yield is often associated with mature companies that may not have immediate reinvestment opportunities for profits. Companies like Comcast with established businesses may choose to distribute profits to shareholders instead of reinvesting. On the other hand, companies like Tesla, focused on growth and innovation, may have a negative shareholder yield due to their investment priorities. Factors like price-to-earnings ratio, investment in assets, and cash reserves can influence a company’s shareholder yield.
While the shareholder yield can serve as a starting point in evaluating a company’s value, it is important to consider other factors and not rely solely on this metric. Exchange-traded funds like Vanguard High Dividend Yield and Cambria Shareholder Yield offer different approaches to selecting companies based on their yield. The Cambria ETF, which considers all three elements of yield, has outperformed the traditional dividend-focused Vanguard fund over the past decade. Overall, the comprehensive definition of yield, incorporating dividends, buybacks, and debt paydowns, can provide a more holistic view of a company’s ability to reward shareholders and generate wealth.
