At the Money: Shareholder Yield
At the Money: Getting More Out of Dividends with Shareholder Yield. Meb Faber, Cambria Investments (October 30, 2024)
Dividend investing has a long and storied history, but it turns out dividends are only part of the picture driving stock returns. One alternative is shareholder yield, which includes not only dividends, but also share buybacks and debt paydowns as indicators of future gains.
Full transcript below.
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About this week’s guest:
Meb Faber is co-Founder and CIO at Cambria Investment Management, as well as research firm Idea Farm.
For more info, see:
Cambria and The Idea Farm
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Find all of the previous At the Money episodes here, and in the MiB feed on Apple Podcasts, YouTube, Spotify, and Bloomberg. And find the entire musical playlist of At the Money on Spotify
Shareholder Yield
Dividend investing has a long and storied history, a substantial percentage of market returns are due to the impact of reinvested dividends compounding over time. But it turns out dividends are only part of the picture driving stock returns. Shareholder yield, as it’s become known, includes dividends, but also share buybacks and debt paydowns as indicators of future gains.
I’m Barry Ritholtz. And on today’s edition of At the Money, we’re going to discuss how you can participate in shareholder yield and get more out of dividends to help us unpack all of this and what it means for your portfolio. Let’s bring in Meb Faber founder and CIO of Cambria. The firm manages numerous ETFs, including those that focus on shareholder yield and is approaching 3 billion in client assets.
He is the author of shareholder yield, a better approach to dividend investing just out in its second edition this week. So Meb, let’s start with the basics. How do you define what shareholder yield is?
Meb Faber: Most common definition is total cash payout, meaning cash dividends plus net stock buybacks net being a very key word there.
Cause it incorporates not just stock buybacks, but also share issuance. So think about just dividends and buybacks. That’s what most people think of when they think of shareholder yield.
Barry Ritholtz: Interesting. Why should companies that are returning cash to investors through either dividends or buybacks be attractive to investors?
Meb Faber: There’s a lot of co inherited traits for a company that’s paying dividends or buying back shares. The biggest is they have to have the cash in the first place. So if you’re paying out a 10% yield, then likely you either have a ton of cash flow or more cash than you know what to do with
A good traditional case study would be Apple who did both. They pay out cash dividend and they do a stock buyback. And the summation of the two is really the combination being agnostic, the holistic that matters.
Barry Ritholtz: So what is the research? And I know you spend a lot of time doing academic research. What does it suggest about higher yielding stocks versus stocks that have little to no yield?
Meb Faber: First of all, investors love dividends. There’s probably no more time-honored tradition than people getting that quarterly dividend check, passive income, people fantasize about sitting on the beach drinking pina coladas in Cabo and getting that dividend check.
But you have to account for structural changes in markets and really starting in the 1980s and accelerating in the 1990s, companies started buying back more stock than they they paid out in cash dividends. And any given year since then, there’s been more buybacks. So investors that focus only on dividends historically now miss over half of the picture on how companies distribute their cash. This is also important. Because of the standpoint of companies that issue shares. So you think the companies in my home state of California, the tech companies that love to make it rain to executives and C-suite with stock based compensation.
So avoiding the companies that have a negative yield, meaning they’re diluting investors every year is important too. And so if you do the combination of these two factors and look at it in history, it’s really been the premier way to look at value investing for the past hundred years.
Barry Ritholtz: So if a company has some extra cash on hand, are they better off raising their dividends, doing a new buyback or a combination of both?
Meb Faber: The answer is it depends. You know, the job of a CEO is really to maximize the return on investment. There’s only five things a company can do with its cash. That’s the menu.
There’s no secret “In & Out “menu here, right? It’s they can pay out a dividend, they can buy back stock, they can pay down debt if they have it, they can go merge or acquire another company. And then the last one, which is what everyone spends 99 percent of the time focusing on is reinvest in the business R and D. So what new iPhone are we launching? What new chip is Nvidia doing? What new service are we offering? But really it’s the job of the CEO to maximize those five levers.
And in some cases, if you look at someone like Apple. You get to be so big and you have so much cash and money, you simply can’t spend it. Now you probably could in a Brewster’s million sort of way, but it wouldn’t be beneficial to shareholders. You see a lot of companies that do that. They spend the money, but in a way that doesn’t maximize, uh, the ROI.
Barry Ritholtz: So let’s talk a little bit about shareholder yield across different market caps.
Does it matter if you’re a large cap or a medium or a small and, and how do you guys think about different size companies and their shareholder yield?
Meb Faber: When we wrote this book a decade ago, you know, we looked at the historical returns of shareholder yield companies and it turned out that shareholder yield beat any dividend strategy we could come up with.
High dividend yield, dividend growth, it beat the market, on and on, and we saw it as really the premier factor. Now, we didn’t invent this; Jim O’Shaughnessy, our bud, has talked a lot about this in his classic book What Works on Wall Street, William Priest and others, but modeling it, we saw that it made the most sense of any strategy we could find.
It worked in large cap, it worked in small cap, it worked in foreign, it worked in emerging. If you have any investing factor, any strategy, you want it to work most of the place, most of the time. If it works in US but not in Japan, that’s a problem. If it works in small cap but not large cap, that’s a problem.
And the beauty of this strategy is it’s not only worked since the publication of the book, but it’s worked as far back as you can take it and it’s very, very consistent. So it, it really captures a number of, of factors and characteristics. The main one, of course, being value and quality, which has been hard to keep up, you know, the romping stomping S&P the past 15 years has creamed everything.
But, shareholder yield across categories right now in 2024. Because of the valuation gap looks about the best it’s ever looked, uh, over the past decade.
Barry Ritholtz: So discussing cap size, you have a shareholder yield ETF for large cap for mid and then a combined small cap and micro cap. And from what I’ve seen over the past few years, they’ve beaten the S&P. If you go back 10 or 20 years, the S&P is still slightly outperforming.
But let’s talk about geography. Those three large, mid and small are all us based. You also have an international version and an emerging markets version. Tell us about overseas shareholder yield.
Meb Faber: So if you look at across all five of these funds, the average stock coming in has a double digit shareholder yield and let that sink in for a second.
S&P is yielding what, 1.3% dividend yield right now. And so ignoring buyback yield is a huge mistake, particularly in the U. S. The U. S. is very very powerful. Corporate buyback focus. So the majority of the shareholder yield in the U. S. comes from the buyback yield again We’re talking about 10% yields coming in in foreign developed and emerging that tends to be closer to 50/50 dividends and buyback. So you’ll see a higher 5 or 6% dividend yield in those geographies. Largely because they have a culture of paying cash dividends more than buybacks, although that is changing you’re seeing in particular countries like Japan You Uh really start to ramp up their buyback focus
And to be clear when you talk about buybacks, there’s so much misinformation Oh my goodness The number one thing is if you frame buybacks simply as tax efficient dividends or flexible dividends It changes your entire perspective across all of this and warren Nobody understands that understands this better than warren buffett warren buffett has been talking about buybacks Right his famous quote on Berkshire.
He says Berkshire’s never paid a dividend It once paid a 10 cent dividend in the 60s and I must have been in the bathroom, right? So he gets it he gets that on buybacks on average if a stock is cheap a buyback is a great use of cash You can buy a dollar for 80 cents for 50 cents and then that’s what you see in the portfolios Across the shareholder yield lineup the price earnings ratios, the cash flow ratios are at a significant discount to the S& P 500, but also the categories these funds tend to be in. We’re talking single digit P/E ratios, which is a, a gap that has widened over the past decade, but in particularly the last three to four years, with some of the largest valuation spreads we’ve seen. So it’s a particularly attractive time we think to be in a shareholder yield stocks.
Barry Ritholtz: So who is the typical buyer of any of these shareholder yield ETFs? Are they traditional value and dividend investors, who do you see as purchasing your funds?
Meb Faber: It’s a little bit of everything. You have advisors that think in the style boxes. So they’re making substitutes like a Lego. You have individual investors. You have institutions that are simply looking for a better approach to not just income, but just equity investing in general.
What’s interesting is you have a lot of investors in this cycle that have shied away from foreign and emerging markets. How many times have you heard? I don’t trust the numbers. I don’t believe in emerging markets, what they’re doing. And our emerging market fund is actually our second biggest fund.
And what’s interesting about emerging markets, if you’re a company. That’s paying out 10% of your market cap in dividends or buying back shares, you know what you’re not doing with that money is squandering it. You’re not, naming stadiums. You’re not buying jets. You’re not doing bribes on and on. You have to have the cash to be able to pay it out. So by definition, this type of strategy is a quality strategy; . So it avoids a lot of those types of companies.
Traditionally in the U. S. This tends towards sectors like financials and energy. And that’s true across all the geographies currently and people say, ma’am, you’re missing out. You’re missing out on the tech. A. I. Boom in the U. S. You have a very low tech exposure in the U. S. And that’s true. Part of that is the tech companies are expensive and they also are doing a lot of share issuance and emerging markets. Tech is the largest sector. And so part of that is simply because emerging markets are down so much. But also, they have a very high shareholder yield there as well.
Barry Ritholtz: So to wrap up, investors who might traditionally have been straight dividend buyers should be considering shareholder yield ETFs. It gives them the full benefit of management that’s trying to return the most amount of cash back to shareholders through both dividends and the more tax efficient ETFs Stock buybacks too.
I’m Barry Ritholtz and this is Bloomberg’s At The Money.
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