S&P 500 Dividend + Buyback Yield

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rmelvey
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S&P 500 Dividend + Buyback Yield

Post by rmelvey » Tue Jul 25, 2017 9:48 am

I found this very interesting report that was updated as of yesterday:
https://www.yardeni.com/pub/buybackdiv.pdf

My favorite chart is on page 9, showing the yield of dividends + buybacks of 4.48%. Buybacks are more discretionary than dividends of course, but they do represent a return of value back to shareholders and I would use this yield as a starting point for long term equity return forecasts.

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JoMoney
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Re: S&P 500 Dividend + Buyback Yield

Post by JoMoney » Tue Jul 25, 2017 10:11 am

You can also get the data directly from S&P
http://us.spindices.com/documents/addit ... yback.xlsx

...I'm not sure what to make of it, but something noteworthy to consider is that Buybacks+Dividends has been exceeding earnings.
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

Valuethinker
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Re: S&P 500 Dividend + Buyback Yield

Post by Valuethinker » Tue Jul 25, 2017 10:16 am

JoMoney wrote:You can also get the data directly from S&P
http://us.spindices.com/documents/addit ... yback.xlsx

...I'm not sure what to make of it, but something noteworthy to consider is that Buybacks+Dividends has been exceeding earnings.
Earnings are not cash flow but if we assume accounting depreciation and amortization are correct in the long run, i.e. that long run capex will equal D&A so that to sustain the business you need to reinvest your main non cash P&L items then

the implication is that companies are outspending their cash flow on dividends + buybacks. They are doing so by either/ or:

- spending less on sustaining the assets of the business (tangible and intangible) than historic costs would suggest they need to do - shrinking the asset base of the business

- borrowing more

I know that in aggregate the latter is true, i.e. that companies are net borrowers to retire equity.

Sectoral effects will have a significant impact. So if the quoted sectors include more "sunset" companies than the economy as a whole, that's not necessarily a bad thing.

This might not end well, though.

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SimpleGift
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Re: S&P 500 Dividend + Buyback Yield

Post by SimpleGift » Tue Jul 25, 2017 11:09 am

JoMoney wrote:...I'm not sure what to make of it, but something noteworthy to consider is that Buybacks+Dividends has been exceeding earnings.
Right, it's mostly coming from borrowed money — which seems crazy for building long-term shareholder value. Actually, this “leveraged buyback craze” may hold more risk for corporate bond holders than stock investors. Outstanding corporate debt is at an all-time high — and most of that borrowed money has not gone into productive investments, but rather share repurchases.

Sure, these funds have been borrowed at low interest rates. But if corporate America doesn’t have confidence in growth and isn’t investing to improve long-term productivity, how is all this debt going to be paid off? Where will the cash come from? These large share repurchases, using borrowed funds, seem to be a trend that cannot last.
Cordially, Todd

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JoMoney
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Re: S&P 500 Dividend + Buyback Yield

Post by JoMoney » Tue Jul 25, 2017 11:29 am

Simplegift wrote:
JoMoney wrote:...I'm not sure what to make of it, but something noteworthy to consider is that Buybacks+Dividends has been exceeding earnings.
Right, it's mostly coming from borrowed money — which seems crazy for building long-term shareholder value. Actually, this “leveraged buyback craze” may hold more risk for corporate bond holders than stock investors. Outstanding corporate debt is at an all-time high — and most of that borrowed money has not gone into productive investments, but rather share repurchases.

Sure, these funds have been borrowed at low interest rates. But if corporate America doesn’t have confidence in growth and isn’t investing to improve long-term productivity, how is all this debt going to be paid off? Where will the cash come from? These large share repurchases, using borrowed funds, seem to be a trend that cannot last.
It does seem to be an unsustainable long-term situation, but there are other considerations in the financial machinations like the massive cash balance sheets held offshore and the use of borrowing for 'synthetic cash repatriation'
"To achieve satisfactory investment results is easier than most people realize; to achieve superior results is harder than it looks." - Benjamin Graham

McGowan
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Re: S&P 500 Dividend + Buyback Yield

Post by McGowan » Tue Jul 25, 2017 11:31 am

I completely agree with this concept and I think it is underestimated in discussing returns.

One clear way to make the 'E' (EPS) of PE higher is to reduce the number of shares outstanding. It is both cynical and true that company managers are highly incentived to increase EPS and this is one way to do it. S&P 500 companies have a ton of cash and excess borrowing capacity for both dividends and buybacks.

As I look at returns moving forward for the S&P 500, I do look at 4.5% (reinvested dividends) as a floor/start. My base case for my personal cashflow model is actually no growth - in my mind that is 4.5% because of dividends and buybacks. If I can do well in that scenario over 40 years then I'm in good shape. I'd love for it to be more but its not part of my planning.

grok87
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Re: S&P 500 Dividend + Buyback Yield

Post by grok87 » Tue Jul 25, 2017 11:54 am

I think all those figures are gross buybacks.

A lot of the time companies appear to be buying back a lot of stock but they are just offsetting the dilution that comes from all the stock options they issue to their execs.
Keep calm and Boglehead on. KCBO.

not4me
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Re: S&P 500 Dividend + Buyback Yield

Post by not4me » Tue Jul 25, 2017 12:03 pm

I'll join the chorus of those who don't think this is good long term. My initial thoughts are that this is likely to be principally driven by (1) central banks having a ZIRP; & (2) tax policy (in more than one way). I'm not a fan of buybacks, but I do see how they could be used in individual circumstances. Even while in the aggregate, it may spell trouble...

Take a case like Apple. & I'll 1st say, I'm not an expert on their situation, but they do get a lot of press about their overseas cash. We know that under current tax law, they'd take a hit if they brought it to US. So, what happens if they issue short/intermediate debt & buyback shares? They can probably borrow money about the same, or slightly higher, rate they pay in dividends. But the interest they pay will reduce their taxes. The debt capital is likely to be less costly than the equity capital & so they effectively lower their overall cost of capital. No doubt they're planning on their cash generation to continue past the life of the debt (as long as they keep some form of discipline).

garlandwhizzer
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Re: S&P 500 Dividend + Buyback Yield

Post by garlandwhizzer » Tue Jul 25, 2017 12:21 pm

The chart on page 10 demonstrates that currently more than 90% of operating earnings is spent on buybacks and dividends. Bear in mind that typically operating earnings are generally higher than GAAP earnings, inflating earnings a bit. Also keep in mind that during recent years, as others have noted, spending on buybacks and dividends actually exceeded operating earnings. What this indicates most clearly is that corporate management lacks basic confidence in the increasing economic growth going forward. They are not spending on increasing productivity, more plant and equipment, because they lack basic faith that there there is sufficient final demand for that increased production. They're giving money back to shareholders to prop up stock prices but are not optimistic about the economy's future growth and increasing final end demand. It suggests a pervasive mood of secular slow growth, low inflation scenario where in the absence of increasing consumer debt there is little stimulus for aggregate demand to increase. There is no point in increasing supply of goods and services if demand is not sufficient to buy them.

I agree that the 4+% shareholder yield (buybacks plus dividends) looks good for investors, but one reason for that high yield is the absence of optimism about future robust economic growth among management. Corporate money is going to shareholders, not to increasing production. All this can change if economic growth picks up substantially but it is hard to see at present where that will come from.

Garland Whizzer

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SimpleGift
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Re: S&P 500 Dividend + Buyback Yield

Post by SimpleGift » Tue Jul 25, 2017 1:02 pm

garlandwhizzer wrote:What this indicates most clearly is that corporate management lacks basic confidence in the increasing economic growth going forward. They are not spending on increasing productivity, more plant and equipment, because they lack basic faith that there there is sufficient final demand for that increased production
Seems right. Looking at the long-term trends in the chart below, U.S. corporate investment as a percent of GDP (blue line) was growing from 1960 to 1980. But ever since share repurchases were allowed in the early 1980s, investment has been on an overall downward trend, mirroring the overall upward trend in net buybacks.
Interestingly, when times are good in the short term, such as the late-1990s, mid-2000s and today, companies appear to be funding BOTH investment and net share repurchases — but this hasn’t changed the longer term, overall trends.
Last edited by SimpleGift on Tue Jul 25, 2017 5:47 pm, edited 1 time in total.
Cordially, Todd

TJSI
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Re: S&P 500 Dividend + Buyback Yield

Post by TJSI » Tue Jul 25, 2017 2:24 pm

rmelvey,

A basic question:

Which stockholders are getting the 4.5% yield?

Those who sold or those who held onto their shares? Or perhaps it is the average shareholder that sells a fraction of their shares?

TJSI

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rmelvey
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Re: S&P 500 Dividend + Buyback Yield

Post by rmelvey » Tue Jul 25, 2017 4:03 pm

Hi TJSI,

Here is how I think about it as a long term holder. If a company pays a dividend yield of 2%, and is also buying back 2% of the shares each year, then the dividend per share also grows by 2% even if they don't change the total $ of dividend dollars paid. The long term return of stocks (absent changes in valuation) is dividend yield + dividend growth.

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Re: S&P 500 Dividend + Buyback Yield

Post by TJSI » Tue Jul 25, 2017 5:10 pm

rmelvey,

Thank you for your reply. You are correct with one provision. Absent any other effect, a buyback by reducing the number of shares will increase the div per share and also the earnings per share. Certainly this is a good thing.

But it is more complicated than just the immediate effect of reducing shares. Future dividends are paid with future cash. Cash which is needed for funding of operations, payment of debt, investments, dividends, and perhaps even more buybacks.

If a company is overpaying for shares, they are wasting money. If they do a billion dollar buyback and the shares have a true value of $800,000 million, then they have wasted $200,000 million. Over time, this eventually will reduce the div per share.

As is typical, Mr. Buffet summed it up succinctly when he said something like: "You can't get rich paying $1.10 for $1.00."

Buybacks are an investment and sometimes are a mistake. Except in the immediate timeframe, there is no automatic long term increase in div per share.

TJSI

grok87
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Re: S&P 500 Dividend + Buyback Yield

Post by grok87 » Tue Jul 25, 2017 5:38 pm

grok87 wrote:I think all those figures are gross buybacks.

A lot of the time companies appear to be buying back a lot of stock but they are just offsetting the dilution that comes from all the stock options they issue to their execs.
this is a little dated but still makes the point
https://www.researchaffiliates.com/en_u ... irage.html

are_buybacks_an_oasis_or_a_mirage
Keep calm and Boglehead on. KCBO.

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packer16
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Re: S&P 500 Dividend + Buyback Yield

Post by packer16 » Mon Nov 20, 2017 9:09 am

It would be interesting to look at the S&P 500 net buyback yield. The article while interesting changes the underlying index from the S&P 500 to the total stock market which I wonder about. Why did they not just sty with same underlying index?

Packer
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