In today's low interest rate environment it can be tough to find attractive yields in stocks or bonds. Typically when investors look at stocks for yield they look at dividend yields. However, dividends are not the only return of capital that companies engage in. They also return capital through share repurchases.
In a recent article on IBM, you can read my rant about why share repurchases are not really capital return for individual investors. However, you can still simulate the experience and have near identical returns and I will show you how in this article.
First, I'd like to introduce the concept of total capital return yield. Total capital return yield is cash generated from dividends and share repurchases divided by the stock price. This is the cash return that you can receive from the company and still maintain the exact same ownership percentage thereby drastically increasing your yield that you receive in cash.
How to Simulate the Big Guys
Let's first revisit rule #1 of investing. Buying stock in a company is buying a percentage ownership of that company. That means that the number of shares you own is meaningless, all the matters is the total company value and your percentage ownership (which is calculated by your shares divided by total shares outstanding). Comparing 100 shares of X to 100 shares of Y is almost certainly meaningless. The reason I bring this up to remind you that selling shares back to the company during a repurchase is not lessening your position in the company as the total shares may be also reduced proportionally. For example let's say "Example Company" has 1,000,000 million shares and you own 1,000 of them. You would own 0.1% of "Example Company". However in the next quarter "Example Company" repurchases 50,000 shares, and you also sell 50 shares, then at the end of the quarter you still own 0.1% of the company which is the same amount you started with and the important number to look at (950/950,000 = 0.1%). And in addition to owning the same percentage as you started with, you would also receive proceeds for those 50 shares.
Share repurchases are often called returning capital to shareholders, but as an individual investor this phrase might confuse you as you don't receive any cash. Although you are too small for the company to actually return cash to you for shares, you can simulate the effect. There are two parts to the total capital return equation. First is the dividend, you do not need to anything different; you will continue to receive these from the company. The second part is the return of capital via share repurchases. For the big boys they often agree to sell directly to the company on a specific date at say the average price over the last 20 days. Unfortunately for you the company doesn't bother giving you that option as it would be rather costly to do that for all shareholders. However, following the end of each quarter, each company releases a 10-Q filing with the SEC and usually posts this and maybe some supplemental material on their website. In this you can see how many shares they repurchased and thus corresponding the percent reduction in total shares. Once you find this number you can sell that percentage of your shares. Doing this will produce cash for you and most importantly you will still own the same percentage of the company that you did before the quarter began. As a result you will have received the quarterly dividend and simulated returning a percentage of shares to the company directly for a capital return program.
Where to Get Ideas
Each quarter, FactSet published a list of companies that are buying back massive amounts of stock and they publish a free article on it. Let's take a look at their latest publication for Q2 (Q3 is usually released in mid-December). The first table below is the table that is included in their free article that I find particularly helpful. The second table below is a table I created that manipulates the data so that you can see the total capital return yield.
As you can see in the table that I manipulated, the dividend yield that you would normally receive is a paltry 2.3%. However if you simulate the total capital return program than you receive a whopping 7.64% return in cash! Go ahead, see what your neighbor has to say when you tell him you stock portfolio is filled with diversified basket of blue chip stocks that are yielding you 7.64% in cold hard cash.
One word of caution is that the table above is using TTM repurchases. Typically companies that repurchase consistently do it and the previous 12 months is a good indication of how much they will be doing in the next 12 months, however I recommend that you check the company's share repurchase authorization as a confirmation that they will be continuing the program.
Finally, there is some good news and bad news with FactSet's article. Let's start with the bad news as it isn't really that bad. The bad news is that this article shows the companies with the largest dollar value buybacks not the largest percentage buybacks which would make your yield even better. The good news is that your yield could be even higher than the 7.6% if you're willing to do a little more work that just reading the FactSet publication. Lastly the article is free, an excellent starting point and contains some excellent ideas so it certainly worth the read.
Disclosure: The author is long IBM, CSCO, AAPL, XOM.
The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.