Are Dividend Investors Benefiting from Stock Buybacks?

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

Relevant Articles:

- Chubb (CB) Dividend Stock Analysis 2011

- Dividends versus Share Buybacks/Stock repurchases

- Wal-Mart (WMT) Dividend Stock Analysis

- Special Dividends Unlock Hidden Value in Stocks

Altria Group (MO): High Dividend Growth Stock

Altria Group’s Board of Directors announced a fresh dividend hike over the past week. Owning shares of this company for several years has delivered a rising stream of dividend income to me, and an appreciation of the simple truths mentioned above. Check my analysis of the stock.

Altria Group, Inc. (MO), through its subsidiaries, engages in the manufacture and sale of cigarettes, smokeless products, and wine in the United States and internationally. The company increased its quarterly distributions by 7.90% to 41 cents/share. This marked the 44th consecutive annual dividend increase for this dividend champion. Despite all the issues that tobacco companies have faced over the past decade, the increased regulation has created an environment which has helped deliver solid results for shareholders. While the number of smokers decreases each year, the increases in cigarette prices more than compensate for that. In addition, it is almost impossible for a new cigarette manufacturer to create a brand to compete with established players like Altria Group (MO). Despite all the gloom, the company has been the best performer in the S&P 500 over the past 50 years.

Investors, looking at the historical distributions of Altria since 2007, see a big dip in dividends. There is a rational explanation for this however - Altria spun off Kraft (KFT) in 2007 and Phillip Morris International (PM) in 2008. As a result, investors who purchased Altria (MO) stock at the end of 2006 would own shares of Altria (MO), Phillip Morris International (PM) and Kraft (KFT), all of which have increased distributions over the past 5 years. As a result, this investor would have received a rising stream of dividend income in each of the past 5 years since the spin offs began. Standard and Poor’s eliminated Altria from its list of dividend aristocrats in 2008, which was a move that is almost as wrong as reducing the rating of the US in recent weeks. The company’s shareholders didn’t suffer reduced dividend income, which is why the S&P’s move to boot Altria from the elite dividend index was highly suspect. This is the primary reason why I am mostly ignoring the dividend aristocrats index and focusing on the dividend champions index exclusively.

Full Disclosure: Long MO, PM, KFT

Relevant Articles:

- Altria (MO) Dividend Stock Analysis

- Dividend Champions - The Best List for Dividend Investors

- Dividend Conspiracies

- Altria (MO) - a recession proof high yield dividend stock

This article was featured in the Carnival of Personal Finance #325

Sysco (SYY) Dividend Stock Analysis

Sysco Corporation (SYY), through its subsidiaries, markets and distributes a range of food and related products primarily to the foodservice industry in the United States. Sysco is a dividend champion has paid uninterrupted dividends on its common stock since 1933 and increased payments to common shareholders every year for 41 years.

The most recent dividend increase was in November 2010, when the Board of Directors approved a 4% increase to 26 cents/share.

Over the past decade this dividend growth stock has delivered an annualized total return of 3.90% to its shareholders.

The company has managed to deliver an increase in EPS of 9.50% per year since 2001. Analysts expect Sysco to earn $1.97 per share in 2011 and $2.07 per share in 2012. In comparison Sysco s earned $1.99 /share the company earned in 2010. The company has managed to consistently repurchase 1.50% of its common stock outstanding over the past decade through share buybacks.


The company’s near term growth prospects will be limited due to fewer Americans going out to eat due to the high unemployment. Additionally, high food inflation and the inability of the company to pass on all of these sharp price hikes on to cash strapped customers from the restaurant industry, which accounts for almost two-thirds of sales, have trimmed earnings growth. Longer-term however, as working adults have less time to prepare meals at home, the business of companies like Sysco should benefit. Increasing the number of distribution centers as well as better management of inventory costs would add to profitability as well. Other areas where Sysco will look to grow earnings include increasing the amount of consolidated purchasing as well as through acquisitions in the US and abroad.

The company has managed to generate high returns on equity, which had consistently remained above 29%. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 15.30% per year over the past decade, which is much higher than the growth in EPS.

A 15% growth in distributions translates into the dividend payment doubling almost every five years. If we look at historical data, going as far back as 1975, we see that Sysco has actually managed to double its dividend every four years on average.

Over the past decade the dividend payout ratio increased from 26% to 49%. The primary reason behind this steep increase was that dividends increased at almost twice the rate of earnings growth. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Sysco is trading at 13.90 times earnings, yields 3.80% and has a sustainable dividend payout. The company currently fits my entry criteria and I would look to add to my position in it subject to availability of funds.

Full Disclosure: Long SYY

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- Six Reliable Dividend Growth Stocks Raising Distributions

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Dividend Stocks – The safest investment in the world

We live in challenging times. Commodities such as oil, gold and silver are going up amid speculation that we are going to have high inflation. Given the ample liquidity pumped into the financial system by central bankers around the world, speculators are bidding up precious metals. In addition, investments such as treasury bonds generate yields which are very low. Chances are that these fixed income instruments would lose purchasing power if inflation accelerates. Other “growth” investments such as Linkedin (LNKD), Pandora (P), Groupon and Facebook seem to be generating investors’ interest because they are part of “social media”, despite the fact that their valuations are unsustainable. So how can investors maintain their sanity, generate returns and live off their portfolios in such uncertain world?

The answer is in dividend growth stocks. Only companies which have solid financial results tend to share a portion of their income with shareholders in the form of dividends. Companies which are weak or focus on growth at all costs tend not to pay a dividend, which means that investors can generate a return on investment only if a greater fool bids up the stock price. On the other hand, companies that pay a portion of their earnings as dividends, generate a consistent return to shareholders. This is a definite plus when stock prices are falling or going sideways for extended periods of time. As a result companies that regularly pay rising dividends to shareholders, tend to be favored by long term holders.

The reason behind the appeal of dividend growth stocks is that only companies which fit certain quantitative and qualitative criteria can afford to create a string of consecutive dividend increases. Qualitative characteristics include strong competitive advantages, strong market share, diversification of operations on a global scale , investment in innovation as well as strong brand names which consumers use on a daily basis and for which they can afford to pay a premium price. At the end of the day, even if we experience another recession, consumers would keep eating, shaving, showering, using water and electricity or talking on the phone. Quantitative criteria include items such as dividend growth, earnings growth, valuation, and return on equity or current yield.

Companies that raise dividends also provide a rising stream of income which retirees could use to live off their portfolios. As a result, investors would not have to worry about selling their growth stocks when the market tanks in order to pay their monthly expenses. The rising dividend stream also ensures that retiree’s incomes are keeping up with inflation. Over time the increase in earnings and dividends makes the company more valuable, which leads to increases in share prices as well, as more investors realize that the shares are undervalued.

Some of the safest dividend stocks, which fit my entry criteria include:

Kinder Morgan Energy Partners, L.P. (KMP) owns and manages energy transportation and storage assets. The company has increased distributions for 15 years in a row. Yield: 6.60%(analysis)

Philip Morris International Inc. (PM), through its subsidiaries, engages in the manufacture and sale of cigarettes and other tobacco products in markets outside of the United States. Yield: 3.70% (analysis)

The Procter & Gamble Company (PG) provides consumer packaged goods in the United States and internationally. The company has increased distributions for 55 years in a row. Yield: 3.40% (analysis)

The Coca-Cola Company (KO) manufactures, distributes, and markets nonalcoholic beverage concentrates and syrups worldwide. The company has increased distributions for 49 years in a row. Yield: 2.70% (analysis)

Colgate-Palmolive Company (CL), together with its subsidiaries, manufactures and markets consumer products worldwide. The company has increased distributions for 48 years in a row. Yield: 2.70% (analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company has increased distributions for 37 years in a row. Yield: 2.80% (analysis)

This is just a sample of quality dividend growth stocks which are sufficiently profitable to afford a rising dividend payment in good times and in bad times.

Full Disclosure: Long all stocks mentioned above

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This article was included in the Carnival of Personal Finance

Six Dividend Stocks Increasing Distributions Despite Market Volatility

Several companies raised distributions over the past week. The companies which I highlighted in this article have each raised dividends for at least five years in a row. These companies also announced dividend increases over the past week. I typically utilize this list in order to find hidden dividend gems. One hidden dividend gem uncovered was Hingham Institution for Savings (HIFS), which has delivered a 61.60% total return since I analyzed the stock in April 2010.

The companies include:

Cincinnati Financial Corporation (CINF) engages in the property casualty insurance business in the United States. The company raised its quarterly dividend by 0.63% to 40.25 cents/share. Cincinnati Financial Corporation is one of eleven companies in the world which have managed to consistently raise dividends for over half a century. Yield: 6.10% (analysis)

MGE Energy, Inc. (MGEE), through its subsidiaries, operates as a public utility holding company. It engages in generating, purchasing, transmitting, and distributing electricity. The company raised its quarterly dividend by 2% to 38.26 cents/share. MGE Energy, Inc. is a dividend champion which has rasied dividends for 35 years in a row. Yield: 3.80%

Delta Natural Gas Company, Inc. (DGAS) distributes or transports natural gas in central and southeastern Kentucky. The company raised its quarterly dividend by 2.90% to 35 cents.share. Delta Natural Gas Company, Inc. has consistently raised distributions for 7 years in row. Yield: 4.50%

ITC Holdings Corp. (ITC), through its subsidiaries, engages in the transmission of electricity in the United States. The company raised its quarterly dividend by 5.20% to 35.25 cents/share. ITC Holdings Corp. has raised distributions for 7 consecutive years. Yield: 2%

Maxim Integrated Products, Inc. (MXIM) designs, develops, manufactures, and markets a range of linear and mixed-signal integrated circuits worldwide. The company raised its quarterly dividend by 4.80% to 22 cents/share. Maxim Integrated Products, Inc. is a dividend achiever which has consistently raised dividends for 11 years. Yield: 4.10%

Nordson Corporation (NDSN) manufactures equipment used for precision dispensing, testing and inspection, and surface preparation and curing. The company raised its quarterly dividend by 19% to 12.50 cents/share Nordson Corporation is a dividend champion which has regularly raised dividends for 48 years in a row. Yield:1.10%

Full Disclosure: Long CINF and HIFS

Relevant Articles:

- How to Uncover Hidden Dividend Gems

- Hingham Institution for Savings (HIFS) Dividend Stock Analysis

- Ten Dividend Kings raising dividends for over 50 years

- Highest Yielding Dividend Stocks of the S&P 500