Comparing Buybacks To Dividend Growth

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 |  Includes: BMI, CB, PFM, PKW, SPY
by: Brad Kenagy

I recently wrote two articles, the first on looking at dividend growth by market cap segment, and the second article was looking at share buybacks by market cap segment. In this article, I will compare thee things: companies that are exclusively buying back large portions [>5%] of their shares, companies that pay a growing dividend, and companies that do both.

My Process

Step 1: Find stocks only buying back stock.

The first step I had was to find a list of stocks that are buying back shares, so I used the holdings of the PowerShares Buyback Achievers Portfolio ETF (NYSEARCA:PKW) as my base list of stocks, which PKW has 209 holdings. I choose to use PKW for my list, because PKW only includes stocks that have bought back at least 5% of shares outstanding over the last year, which is a significant percentage.

Step 2: Screen stocks that only have a buyback.

The second step was I copied and pasted the list of holdings in to the FinViz.com Screener, and then I selected the dividend yield criteria and set it to zero, leaving me with a list of 94 stocks only buying back shares. I then exported those stocks with the 1-year returns into a spreadsheet.

Step 3: Find stocks only growing dividends

I had was to find a list of stocks that are only growing their dividends, so I used the holdings of the PowerShares Dividend Achievers Portfolio ETF (NYSEARCA:PFM) as my base list of stocks, which PFM has 210 holdings. I chose PFM because it only holds companies that have been growing their dividends for at least 10 years in a row.

Step 4: Remove companies with buybacks

I then had to remove companies that were buying back shares so I looked to see what stocks were in both PFM, and PKW, I found that after removing the companies with buybacks there were 202 remaining out of the 210 original list. I then put that list of 202 companies in the Finviz screener to get the data for the 1-year returns, which I then copy and pasted into a spreadsheet to compare to the companies with buybacks.

Step 5: Create list of companies buying back stock and paying growing dividend.

This is simply is the list of stocks 8 stocks that I removed from step 4 above. I copy and pasted the list of 8 stocks into the Finviz screener to get the 1-year returns, which I then copy and pasted into my spreadsheet.

Results/Observations

In the table below are the average returns for stocks with only buybacks, only dividend growth and companies that are buying back shares and paying a growing dividend, along with a comparison to the SPDR S&P 500 (NYSEARCA:SPY). The data clearly shows that companies that exclusively bought back stock unperformed dividend growth by a wide margin, and underperformed the SPY. The underperformance of buybacks surprised me, but what really surprised me was the horrible percentage of stocks that have posted a 1-year positive return, which is just over 60.64% compared to dividend growth, which came in at 88.12%. Out of all the categories I compared, companies that bought back shares and paid a growing dividend performed the best, which is consistent with what I have, wrote in an earlier article about dividends and buybacks.

Strategy

Number of Stocks

Holdings with + 1-yr return

% of Holdings with + return

Average Return

Buybacks with NO dividends

94

57

60.64%

11.72%

Dividend Growth with NO buybacks

202

178

88.12%

18.24%

Buybacks AND Dividend Growth

8

7

87.50%

19.82%

SPDR S&P 500

16.03%

Click to enlarge

Examples:

Below are the top 3 performing companies of the last year, out of my list of 8 companies, which buy back shares and are growing their dividends.

  1. Badger Meter, Inc. (NYSE:BMI): +60.07%

2. Chubb Corporation (NYSE:CB): +28.88%

3. Lowe's Companies, Inc. (NYSE:LOW): +26.82%

Closing thoughts

Based on my data, its is clear that the odds of a stock that just uses buybacks to return capital is less likely to outperform the market. Of course, there are exceptions to that but on average the odds are not in your favor. On the other hand, my data shows that dividend growth stocks produce higher returns and have better odds of outperforming. In closing, for the most part, I would avoid stocks that are returning capital by just buying back shares, and conversely, I would lean more heavily towards stocks that are growing their dividends, or towards companies growing dividends and buying back shares.

Disclaimer

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.