A Better Way to Do Dogs of the Dow?

by: Larry MacDonald

There may be a better way to do the Dogs-of-the-Dow strategy and the Canadian version of the latter. And that is to include share buybacks. Buybacks are another way to return value to shareholders. They add value by increasing earnings per share (and are more tax efficient since there is no distribution to be taxed).

Jack Hough discusses how to include buybacks in his book Your Next Great Stock. Instead of sorting by dividends, stocks are sorted by the “net payout ratio.”

It is the sum of funds spent on dividends and share repurchases, less funds received from share issuance, divided by market capitalization. Hough cites a study showing this new version returned 19.1% annually from 1983 to 2005, compared to 16.2% for the old version.

OptimisticAmateur blogger has applied a modified form of the Hough approach to David Stanley’s Beating the TSX, using data from MSNMoney.com. It comes up with a different list of companies for the 2010 portfolio, as shown below (companies are ranked from highest to lowest net payout ratios, and dividends are shown in brackets).

  • Rogers Communications (NYSE:RCI) (3.49%)
  • Power Corp. (4.25%)

  • BCE Inc. (NYSE:BCE) (5.45%)

  • Shaw Communications (NYSE:SJR) (4.58%)

  • TELUS (NYSE:TU) (4.96%)

  • Husky Energy (OTCPK:HUSKF) (4.43%)

  • Tim Horton’s (THI) (1.48%)

  • Enbridge (NYSE:ENB) (3.52%)

  • Sun Life (4.74%)

  • Royal Bank (3.33%)

This new list has 4 different stocks than Stanley’s list. Rogers Communications, Tim Hortons, Royal Bank and Enbridge replace TransAlta (NYSE:TAC), TransCanada (NYSE:TRP), Bank of Montreal (NYSE:BMO) and CIBC. The four that were displaced had major issuance of new shares last year, so their net payout ratios were low or even negative.

Maybe this version of the Beat the TSX has a better chance to outperform? Not only does it select companies more likely to add to shareholder value, but it is less followed and so, one would expect, less discounted by the market — at least for now.

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