Corporations typically return cash to shareholders in two ways – through share buybacks or in the form of dividends. In a previous article I compared and contrasted both methods of returning cash to shareholders.
My analysis of Chubb (CB) spurred a lively discussion among readers, some of which use Net Payout Yield. The net payout yield represents the total amount of cash paid for dividends and spent on share buybacks, divided by the market value of the company. Some investors believe that this should be taken in consideration, whenever someone analyses a stock.
Rather than take these readers words for it, I decided to crunch some numbers. I noted that Chubb (CB) has spent the following amounts for share repurchases over the past 4 years: ( in millions of $)
The most interesting part in this exercise is that the highest price for Chubb stock was $66 reached in 2011. Before that, the highest price was in 2008 at $65. What the company is not showing is that it is repurchasing shares, yet it is also issuing shares most probably to executives who have chosen to exercise their stock options at ridiculously low prices.
The company has spent $1.88 billion on dividends over the past 4 years. However, it has spent $6.24 billion on share repurchases. It spent 3.30 times more on buybacks than on dividends.
An investor with 4.23 million shares in 2006 would have owned 1% of the entity, whereas now they would own 1.30% because of the anti0dillutive effect of share repurchases. However the stock ended 2006 at $53. Had all the cash been paid out as dividends, the investor would have received $19 in dividends/share over a 4 year period (for a 36% return). ( I get to $19 by adding up 1,881 billion spent for dividends and the 6,237 billion spent for buybacks and assuming the number of shares stayed constant, and then dividing by 423 million shares).
Instead, the investor received $5.36 in dividends in total for 2007, 2008, 2009, and 2010. The stock closed 2010 at $60. So the total return was 23%.
I also analyzed three of the largest dividend paying stocks, which repurchased massive amounts of stock over the past several years. The companies include Wal-Mart (WMT), Exxon-Mobil (XOM) and IBM (IBM).
ExxonMobil (XOM) shareholders would have received $21.61/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 28.20% return). Instead, shareholders received a paltry $6.32/share over the 2007-2010 period. The stock closed 2006 at 76.63and traded at 11.60 times earnings. The stock closed 2010 at 73.12 and traded at 11.80 times earnings. The amounts paid per each repurchased share appear reasonable. The increase in share count in 2010 was prompted by the acquisition of XTO energy. Check my analysis of XOM.
Wal-Mart Stores (WMT) shareholders would have received $11.82/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 25.30% return). Instead, shareholders received a paltry $4.13/share over the 2007-2010 period. The stock closed 2006 at 46.18 and traded at 17.40 times earnings. The stock closed 2010 at 53.93 and traded at 12.90 times earnings. When looking at the amount paid per share over the past 4 years, investors should remember that the stock price never went above $63 during our study period. While the share buybacks might not have been beneficial to ordinary WalMart (WMT) shareholders, they have been helpful for the Walton family. The Walton family stake in Wal-Mart has increased to above 50%, mainly due to the fact that the family is holding on to their stock, while the company is using shareholder’s cash to repurchase stock held by others. Check my analysis of WMT.
It seems that IBM (IBM) shareholders would have received $40.53/share between 2007 – 2010 has all the cashflow been returned in the form of dividends (for a 41.70% return). Instead, shareholders received a paltry $8.05/share over the 2007-2010 period. The stock closed 2006 at 97.15 and traded at 16 times earnings. The stock closed 2010 at 146.76 and traded at 12.70 times earnings. The amounts paid per each repurchased share look particularly out of line, given the fact that IBM never traded above $150 until early 2011. Check my analysis of IBM.
Of course, over the long term, (after 10-20 years), the price of each of the stocks mentioned above would be much higher than what it trades for today. As a result, the partners in the business who sold below at current prices would be kicking themselves for their sell decisions between 2007 -2010. However, the partners in the business who held on to their investment would have seen this share repurchase as a smart option.
To summarize however, I would much rather receive special dividends, than get share buybacks.
Full Disclosure: Long CB, WMT, XOM