Seeking stocks with attractive and sustainable dividend yields is a popular investment strategy. Many investors like to count on that steady income.
But total return, which combines the company’s share buybacks with its dividend, is also worth considering.
High-yield stocks tend to have bent value. But finding companies that buy back their shares and pay a dividend offers “a combination of value and growth, and that’s why we like it,” says Chris Senyek, chief investment strategist at Wolfe Research. “It’s a happy medium.”
At least in theory, the benefit of a share buyback is that it reduces the share count, thereby increasing earnings per share. Many companies, however, issue additional shares, so repurchasing doesn’t always lower the share count.
Senyek and several colleagues released a note Friday that includes a list of the largest US stocks with a total return of more than 7%. Their stock screening eliminated all companies with debt-to-EBITDA ratios (earnings before interest, taxes, depreciation and amortization) above 3.5.
Senyek says these stocks are well fortified to outperform in the coming year.
They have stability and income, which is good in an economic slowdown, he says, adding that they “offer some general defensive characteristics.”
Several companies on Wolfe’s list have leaned heavily towards buybacks.
(ticker: AZO), for example, has a total return of 10.7%, but it comes entirely from share buybacks.
by Barron decided to highlight a few companies that have been fairly balanced in the way they return capital to shareholders through dividends and buybacks—
Bristol Myers Squibb
Prudential Financial, a large insurer and asset manager, has a total return of 7.9%—4.7% on its dividends and 3.2% on repurchases. Most of the companies Wolfe Research cites have higher repurchase yields, a testament to the popularity of this approach.
Prudential FactSet’s 2023 earnings estimate is $11.93 on an adjusted basis, compared to $9.54 it expected when it reported its 2022 earnings on Feb. 7.
Earnings growth often translates into higher cash flow, which funds higher returns on capital.
Wells Fargo has a total return of approximately 9.8%—7.2% on repurchases and 2.6% on dividends.
The San Francisco-based major national bank is expected to earn $4.80 a share this year, up from $3.14 in 2022.
Pharmaceutical company Bristol Myers Squibb has a total return of 9%, with 3.2% coming from the dividend. Buybacks represent 5.8%.
The company is expected to earn $8.09 per share this year on an adjusted basis, up from $7.70 in 2022.
Darden Restaurants has a total return of 8.3%. Buybacks represent 5% with the remaining 3.3% coming from the dividend. The company is expected to earn an adjusted $7.84 per share in its current fiscal year, which ends in May, up from $7.40 previously.
Webster Financial, a regional bank headquartered in Stamford, Connecticut, has a total return of 7.9%, with buybacks of 4.9%. The dividend yield was 3%.
Analysts polled by FactSet expect the company to earn $6.83 per share this year, up from $5.59 in 2022.
One benefit of buybacks is that they can change quickly from quarter to quarter. A dividend cut, by contrast, is often treated harshly by the market.
As a result, total return companies “have more flexibility to cap capital returns as needed to offset weak cash flows,” Senyek says.
Write to Lawrence C. Strauss at [email protected]