Leaning on dividend-paying stocks has become the go-to move for income investors losing patience with inflation-lagging bond yields. The 2.5% yield of dividend-payers in the S&P 500 stock index is a half a percentage point better than the interest payout on a 10-year Treasury note.
Even better is that some solid blue chips with dividend yields in the 2.5%-3.5% range are actually delivering yields of 4% or more once you add in the impact of share buybacks.
Share repurchases are the “other” way that companies return capital to shareholders. The payoff is that by reducing the number of outstanding shares, each remaining share owns a bit more of the company. That said buybacks have a bit of a checkered reputation. Studies have shown that some management teams have the habit of buying back when their stock price is high. Chalk that up to bad timing, or perhaps a desire to boost earnings-per-share performance to trigger fat compensation bonuses, as Warren Buffett has noted.
But when a company commits to a buyback program when a stock is trading at a compelling valuation -- and when that buyback is spread over time to avoid poor timing -- it can indeed be a solid move for shareholders.
Platinum subscribers can chart the impact of buybacks using the Shares Outstanding metric that is at the very bottom of the Balance Sheet category in the Chart Creator.
Adding the percentage reduction in shares outstanding to dividend yield makes some compelling blue chips even more compelling.
Exxon-Mobil’s (XOM) current dividend yield of 2.6% is solid, if not eye-popping. But the company has also been aggressively buying back shares for the past five years. To compute a current total yield I set the Shares Outstanding metric timeframe to one year, checked the “display chart as percent change” and voila:
Add that 2.06% decline in shares outstanding to the 2.6% dividend yield and suddenly XOM is transformed from a nice yield story to a rock star over the past year: A 4.66% total yield for a stock that trades at a below 10 PE ratio. A nice kicker is that Exxon-Mobil consistently increases its dividend payout; over the past five years the annualized rate is more than 7%.
Coca-Cola (KO) has a 3.1% dividend yield, but adding in the 1% reduction in shares outstanding over the past year pushes its return of capital up to a nice 4.1%. And there should be more of that coming. Last fall Coca-Cola announced plans to repurchase up to 500 million shares, which would reduce its shares outstanding by more than 10%. (There is no given time frame for the repurchases.) Another “return” bonus is Coca-Cola’s long history of boosting its dividend payouts; that growth is built in inflation protection that no bond can deliver: