Share Repurchase Yield: A Guide to Investing

Share repurchase yield is a powerful tool for investors to gauge a company's financial health and potential for growth. It's calculated by dividing the annual dividend per share by the price paid for the share when it was purchased.

A higher share repurchase yield typically indicates a more attractive investment opportunity, as it suggests the company is buying back its own shares at a relatively low price. This can be a sign that the company believes its stock is undervalued.

The share repurchase yield of 5% or higher is considered attractive, as it indicates the company is buying back its shares at a relatively low price. This can be a sign that the company believes its stock is undervalued.

Investors can use share repurchase yield to compare the attractiveness of different companies and make more informed investment decisions.

Share repurchase yield is a metric that helps investors understand the effectiveness of a company's share buyback strategy. It's calculated by dividing the dollar amount of shares repurchased by the average price paid for those shares.

A higher share repurchase yield indicates that a company is successfully buying back its own shares at a relatively low cost, which can boost its earnings per share (EPS) and potentially drive up its stock price.

The share repurchase yield can be influenced by various factors, including the company's cash reserves and its confidence in its financial performance. For example, a company with excess cash may use it to buy back shares, which can be a sign of its confidence in its ability to generate future profits.

To calculate the share repurchase yield, you can use the following formula: (Dollar amount of shares repurchased / Average price paid for those shares) x 100.

Let's take the example of a company that buys back 20% of its shares, reducing the outstanding shares from 100,000 to 80,000. As we saw earlier, this results in an improved EPS of $12.50.

Share buybacks are a useful tool for companies to return value to their shareholders. They reduce the total number of shares outstanding, which can prevent a decline in the value of a stock by reducing the supply of the stock.

Buybacks also improve the Earnings Per Share (EPS) of the company, which is a good indication of the company's profitability and may boost its share price in the long run. This is because the same profit is spread over fewer shares, increasing the EPS.

Tax efficiency is another advantage of buybacks. Unlike dividends, which attract tax in the range of 15% to 20%, buybacks don't incur any additional tax on the buyback sale process. This makes them a more tax-efficient way to return capital to shareholders.

Companies can use excess cash lying idle from a lack of opportunities to fund buybacks. For example, Apple, which holds excess cash, can use it to buy back its shares.

Buybacks also provide liquidity opportunities for thinly traded stocks. This is especially useful for companies that want to show their confidence in the stock and send a message that it's undervalued.

Here are some of the key benefits of buybacks:

Accenture, a leading IT company, returns 100% of its annual net income to its shareholders, with a preference for buybacks over dividends in a ratio of 65% to 35% over the last 3-4 years.

Accenture's FY16 ROE stands at ~47%, which is significantly higher than it would have been if the company followed a conservative capital structure or paid dividends instead of doing a buyback.

The company's return of cash to its shareholders in the last 5 years is as follows:

Travelers Companies, one of the largest publicly traded insurance providers, uses an effective buyback strategy to generate excellent returns, with a growth rate of about 1% per year in revenue over the past decade.

Their interest rate on their multi-billion dollar bond portfolio is far lower than it used to be, which means much less income, but they still managed to outperform the S&P 500 total return index by a fairly wide margin.

Travelers has returned over 385% compared to 287% for the S&P 500, with literally all of their returns coming from dividends and buybacks.

The company's price-to-earnings ratio averaged only about 12x during this period, making each dollar they spent buying back their own shares go a long way.

Share repurchase yield is a powerful tool for investors to evaluate a company's performance. It's essentially the total return shareholders receive from a company, in the form of cash dividends, net stock repurchases, and debt reduction.

A good analogy for share repurchases is buying out business partners. Imagine ten people start a business, and each one owns 1/10th of it. If one of them wants out, the company buys their stake, reducing the number of shares in existence and making each remaining owner's share worth a larger percentage of the company.

The term "shareholder yield" was first used by Epoch Investment Partners' William Priest in his 2005 paper. He described five things a company can do with its free cash flow: paying a cash dividend, buying back stock, paying down debt, reinvesting in the company, and making acquisitions.

Companies that consistently buy back their own shares can lead to excellent per-share growth of value, price, and dividends. I've made a lot of money over the last ten years from investing in slow-growing insurance companies that buy back huge amounts of their own shares.

The formula for calculating share repurchase yield can be broken down into four components:

An alternative calculation for share repurchase yield is to use cash dividends and net share purchases in the denominator and exclude net debt paydown. This approach can provide a more accurate picture of a company's return to shareholders.

Productive capital allocation can be critically important to the sustainability of a business and returns for long-term shareholders. Companies with productive capital allocation plans that responsibly return capital to shareholders will be at an advantage in the years ahead.

The past year has shown that shareholder yield and risk management are crucial, especially as we exit the era of ultra accommodative monetary policy. The cost of capital has sharply risen, and therefore the hurdle rate for capital investments has spiked too.

Effective capital allocation and share repurchase efficiency will have significant investment implications in the years ahead. We believe effective capital allocation plans that responsibly return capital to shareholders will be a key differentiator for companies.

Not all buybacks are created equal, and some approaches can lead to poor outcomes for long-term shareholders. Share repurchase efficiency can be assessed in a number of ways, but we believe the Effective Ratio & Shareholder Yield are two of the most important.

Dividends are a way for cash-rich companies to return surplus cash to investors, keeping their interest in the stock.

This is especially important for investors who rely on regular cash flows, such as retirees or those with limited income.

Dividends are distributed from a company's after-tax profit, which means they're a key part of a company's financial strategy.

In fact, dividends received by shareholders are taxed differently, making them a crucial consideration for investors looking to minimize their tax liability.

As a result, dividend payments can have a significant impact on an investor's overall return on investment.

The market has undergone a significant shift in the past year. The era of ultra accommodative monetary policy has come to an end, and with it, the tide of central bank liquidity that lifted all boats.

The cost of capital has sharply risen, and the hurdle rate for capital investments has spiked too. This new economic reality demands long-term sustainable growth and profitability.

Effective capital allocation and share repurchase efficiency will have significant investment implications in the years ahead. Companies that prioritize these aspects will be at an advantage.

Not all buybacks are created equal, and some approaches can lead to poor outcomes for long-term shareholders. It's essential to assess share repurchase efficiency using metrics like the Effective Ratio & Shareholder Yield.

We believe companies with productive capital allocation plans that responsibly return capital to shareholders will be in a better position to navigate this new market landscape.

You can find buyback opportunities by looking at the top 100 S&P 500 companies in terms of the percentage of market capitalization worth of shares they are repurchasing over the last 12 months.

This can be done through an equally weighted index that has considerably lower average valuations than the S&P 500 in terms of price-to-earnings and price-to-book.

The SPDR S&P 500 Buyback ETF is a relatively inexpensive way to invest in this index, with an expense ratio of 0.35%.

You can also download a list of all holdings in Excel format by clicking on the ETF page and selecting "holdings", which is an excellent list of buyback stocks to look through for investment ideas.

Some notable companies that are buying back considerable shares without sacrificing market share include Home Depot, Texas Instruments, Traveler's Companies, Discover Financial Services, J.P. Morgan Chase, and Dollar General.

A key metric to evaluate buyback opportunities is the shareholder yield, which is the combination of dividends and buybacks as a percentage of market cap.

For example, Discover Financial Services has a 9% shareholder yield due to its 2% dividend yield and 7% share buyback rate, while Home Depot has a 5% shareholder yield due to its 2% dividend yield and 3% share buyback rate.

Higher shareholder yields are not always better, as they mainly indicate where returns are expected to come from, and slow-growth companies may require higher yields to compensate for lower growth.

Here are some examples of shareholder yields for the companies mentioned earlier:

When evaluating shareholder yield, consider the company's growth prospects, as a higher yield may be necessary to compensate for slower growth.