Stock buybacks drove Marathon Petroleum to a hefty shareholder yield. Here, a Marathon refinery in Carson, Calif.
Robyn Beck/AFP/Getty Images
Last week’s Income Investing column focused on shareholder yield, which combines dividends with stock buybacks, by sector. This week, Barron’s decided to drill down and look at the shareholder yields of 10 particular companies in the
True, equity income investors probably are more concerned about the dividend, because it’s money in their pockets today, while the benefits of a stock buyback would accrue further out. Still, a shareholder yield is important to consider for those investors seeking dividend income.
“The presence of a buyback on top of an above-market dividend yield is a strong indication that management is going to probably continue to be a good capital allocator,” says Chris Senyek, chief investment strategist at Wolfe Research.
It’s also often a sign that a company will continue to support its dividend and boost it regularly, he adds. “To me, the combination of a dividend and buyback yield is a proxy for capital-return-friendly management teams and companies.”
But different investors can take away different things from a shareholder yield.
(ticker: AAPL), for instance, has a paltry dividend yield of 0.5%, though its payout has been growing regularly. Its shareholder yield, however, was 4.5% recently, thanks to a lot of buybacks. In its fiscal year ended last September, Apple repurchased about $86 billion of its common shares on top of $14.5 billion in dividends.
“The Street is laser-focused on buybacks for Apple rather than dividends, given its growth prospects,” says Dan Ives, a technology analyst at Wedbush Securities. “The overall yield is healthy and adds to the Street looking at Apple as a Rock of Gibraltar tech stock” during a difficult stretch for that sector.
With the help of Wolfe Research, Barron’s screened for the 10 S&P 500 companies with the highest shareholder yields, but with a twist. To make the cut, a company had to have a dividend yield of at least 2%. That’s well above the S&P’s recent average of around 1.4%.
“Note: Yields and recent prices as of March 28; buyback yields are based on the trailing 12 months. ”
Sources: Wolfe Research; Bloomberg; FactSet; Standard & Poor’s
As the accompanying table shows, share repurchases were the biggest driver of shareholder yields for these companies, easily surpassing dividend yields. The buyback yield, however, can vary sharply from one year to the next, depending on a company’s preference.
Case in point:
(HPQ), whose products includes desktop and notebook computers, tops the list with a shareholder yield of nearly 22%, lifted by a buyback yield of 19.3%.
In the company’s fiscal year that ended last October, it repurchased about $6.2 billion of stock, compared with $3.1 billion a year earlier. That increase gave the company’s shareholder yield a big tailwind.
Senyek says that he considers a company’s dividend to be an arrangement that’s “semi-contractual” with shareholders—and that companies are reluctant to cut their dividends given the fallout that often occurs for the stock price. “Buybacks can be much more variable and less quasi-contractual,” he says.
One-off events like a major asset sale can have a big impact on a company’s shareholder yield. For example,
(MPC), No. 2 on the list, has a shareholder yield of 15%, helped by a heavy dose of buybacks. In its most recent annual report, the refiner points out that it received about $17.2 billion in after-tax proceeds from the sale last year of its Speedway gas station and convenience store business to 7-Eleven. Marathon has committed to $10 billion in share repurchases through the end of 2022, about 55% of which had been completed by this past January.
Seagate Technology Holdings
(STX), which sports the third-highest shareholder yield on the list at 13.8%, has a big dividend yield of 3%. However, the company bought back about $2 billion of its stock in its previous fiscal year, lifting the shareholder yield.
Six of 10 stocks in the table are in the financial sector, including
(MS). It was one of the large financial firms that the Federal Reserve restricted from buying back stock early in the pandemic—though that was subsequently lifted. Its shareholder yield was recently at nearly 11%, with a dividend yield of 3.1%. Last year, Morgan Stanley repurchased about $11.5 billion of its common stock, up from $1.3 billion in 2020.
The list also features a pair of insurance companies—
(MET), with a shareholder yield of 11.3%, and
(LNC), 11.7%. Other financial firms include
(SYF), which specializes in private label charge cards for various retailers, 13.2%;
(ZION), 11%; and
Bank of New York Mellon
One other company on the list,
(WHR), specializes in appliances. It has the highest dividend yield on the list at 3.8%. But its buyback yield of 8% is one of the lowest.
About Tesla’s, Ahem, Dividend
(TSLA), known for its signature electric vehicles, is in full growth mode. That’s partly why there was some confusion when the company announced a dividend of sorts this past week. The company said in a March 28 securities filing that it plans “to enable a stock split of the Company’s common stock in the form of a stock dividend.”
Except that it won’t be a traditional per-share dividend distribution, according to two analysts Barron’s spoke to. Instead, it will be a 5-for-1 stock split. Tesla couldn’t be reached for comment about the filing’s phrasing.
The company isn’t referring to a traditional cash dividend, says Seth Goldstein, equity strategist at Morningstar. Instead, as he interprets the filing, “they’ll effectively issue however many more shares and give each shareholder that corresponding number” of shares. He adds that he doesn’t expect the company to start paying a dividend as most investors tend to think of it “anytime soon.”
Write to Lawrence C. Strauss at email@example.com