Buybacks for US, Dividends for EU
A deep dive on shareholder yield
For centuries, dividends have served as the staple mechanism for returning cash to shareholders when companies had no better use for excess capital. However, over the last 20 years, buybacks appear to have become the new dividends, at least in the US. During that time, the scale of buybacks has been steadily growing. Since 2012, when Apple began buying back shares, it has repurchased over $800 billion worth of stock. It’s worth asking what investors are getting for these buyback programs and how investors perceive them relative to dividends.
To examine this question, we scored 24,000 companies monthly since 1995 and decile-ranked them on dividend yield, net repurchase yield, and total shareholder yield (dividend yield + net repurchase yield). We then grouped by decile and calculated the average 12-month forward total return (including dividends). Below we show how dividend yield deciles spread forward 12-month returns for US and international equities, excluding emerging markets.
Figure 1: FWD 12M Return vs. Dividend Yield Decile in US vs. Intl (ex. EM)
Source: Capital IQ, Verdad analysis
Interestingly, relative dividend yield doesn’t do a good job of explaining differences in return for US stocks, but it does for international (ex. EM) stocks. International stocks with higher dividend yields tend to enjoy higher returns, whereas dividend yields have negligible impact in the US.
The same cannot be said for repurchase yield, defined as share repurchases minus share issuance divided by market capitalization. Net repurchase yield decile rank appears to spread forward 12-month returns extremely well, for both US and international (ex. EM) equities, although it appears to be slightly more linear for the US.
Figure 2: FWD 12M Return vs. Repurchase Yield Decile in US vs. Intl (ex. EM)
Source: Capital IQ, Verdad analysis
The net effect of both trends is that total shareholder return can explain forward returns quite well, but how investors reward the composition of shareholder returns differs. In the US, companies with higher buyback yield enjoy higher returns, but higher dividends appear to have negligible impact on forward returns. Internationally, higher dividend yields have a linear relationship with higher returns, and higher buyback yields have directionally higher returns, but the relationship is less monotonic.
What to make of this? In his excellent book, Shareholder Yield, our friend and fellow investor Mebane Faber makes the case that combining both dividend yield and net repurchase yield into total shareholder yield is a far stronger metric. Indeed, we found that the combined metric does a relatively good job of spreading returns in a linear fashion, both in the US and abroad.
Figure 3: FWD 12M Return vs. Shareholder Yield Decile in US vs. Intl (ex. EM)
Source: Capital IQ, Verdad analysis
We have heard some hypotheses for why companies with higher buyback yields within the US enjoy higher returns. One of the arguments we’ve heard has been that having a guaranteed “buyer” of the stock every day will mechanically push up the stock price.
As a sanity check, we also looked at how repurchases as a percentage of average daily volume (or “buyback pressure”) explained return. We saw a similar relationship to buyback yield, where companies with high buyback pressure enjoy higher returns. However, net repurchase yield and buyback pressure are 0.95 correlated, so it’s difficult to say that any buyback pressure effect is distinct from buyback yield in general.
Regardless, the takeaway is that return of capital to shareholders is still rewarded. Internationally, investors still like dividends, but also reward companies with higher repurchase yields, while the preference in the US has shifted to buybacks over dividends.