Friday, November 28, 2014

Shareholder Yield Investment Approach: The Best Of Both Worlds - Dividend Payers And Buyback Companies

We have noted in a number of posts over the years how dividend growth stocks tend to outperform the overall market (S&P 500 Index) over time. One reason this has occurred is the characteristic that dividend paying/growth stocks tend to comprise more of the defensive sectors of the S&P 500 Index. As a result in down markets, the dividend growth stocks tend to hold up much better than the broader market and the laws of compounding kick in and favor the growers.

Recently though, S&P Dow Jones Indices looked at dividend growers, companies that buyback their shares and on a combined basis, top shareholder yield firms. S&P's comprehensive white paper on the topic, Examining Share Repurchasing and the S&P Buyback Indices, contains a wealth of information, but concludes the "shareholder yield" portfolios tend to outperform the other indices over time. As the below chart notes, the shareholder yield portfolio (green bar) has outperformed the other indices in all time periods except the 20-year return time frame. The white paper does note though, on a risk adjusted basis, the shareholder yield portfolio has the highest risk adjusted return for all time periods.

From The Blog of HORAN Capital Advisors
Data source: S&P Dow Jones Indices

The white paper analyzes the implications of dividend contribution to return and the impact of equal weighting. Also, the report looks at some of these strategies across different asset class, such as midcap and small cap. One interesting asset class is the S&P Global 1200 Buyback Portfolio (IPKW). Given the underperformance of stocks outside the U.S., focusing investments on international payers and buyback companies would be one way investors might gain exposure to these underperforming markets in a potentially less volatile way.

Some of the conclusions in the white paper note:
  • "...over a long investment horizon, buyback portfolios generated positive excess returns over their parent indices in the U.S., Canada, Europe and global markets. All of the buyback portfolios tested generated higher average monthly excess returns over their parent indices in down markets than in up markets, no matter which weighting schemes were employed in the portfolio construction."
  • "The equal weighting method employed in the construction of buyback indices enhances the index performance in terms of win ratios and excess returns in up markets, making the outperformance of buyback indices more balanced in both up and down markets. However, the equal weighting method also boosted the index volatility. In comparison, the market cap weighted buyback indices tended to have lower volatility than their parent indices. The impact of equal weighting is more significant in the large-cap space than in mid- and small-cap spaces."
  • "Style analysis indicates both equally weighted and market cap weighted buyback portfolios are value tilted in the past 14 years that ended March 31, 2014. The overlay of equal weighting may enhance the value tilt and give the portfolios an extra small-cap bias, especially in the large-cap space.
  • Compared with dividend investing, buyback investing strategy has several unique features if both employ an equal weighting method. Buyback portfolios tend to have lower dividend yields and most of their outperformance comes from capital gain instead of dividend income, which is a significant contrast with dividend yield portfolios. In the U.S. and Canada, buyback portfolios have tended to have more balanced win ratios or excess returns in both up and down markets, which could be a good complement to defensive approaches such as dividend and low volatility strategies."

Examining Share Repurchasing and the S&P Buyback Indices
S&P Dow Jones Indices
By: Liyu Zeng, CFA, Director, Index Research & Design
July 2014

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