I recently finished the book Millennial Money by Patrick O'Shaughnessy who you might know from his Invest Like the Best podcast. Both Patrick and his father James are prominent proponents of factor investing (a.k.a. evidenced based investing), researching and writing extensively on the subject. One particular factor that is prevalent in the Millennial Money book is shareholder yield, a term I decided to explore further.
Although I previously thought that shareholder yield was the sum of dividend yield and buyback yield, I discovered through the S&P TSX Composite Shareholder Yield Index a debt paydown yield is also incorporated. Using the methodology provided by S&P, I tried to recalculate the three components of shareholder yield for the 50 companies that are equally weighted in the index. Based on my results (especially the negative values for the four companies at the bottom of the list), I likely made some mistakes in trying to replicate the calculation methodology set out by S&P. However, I still think the below table identifies some Canadian-listed companies whose management teams are capable capital allocators based on their ability to enhance shareholder value by paying dividends, buying back their shares and paying down debt.
Some of my preliminary observations from the above table are:
- Most of the dividend yields presented above are lower than the current dividend yields (i.e. H&R REIT, Corus Entertainment, Shaw Communications, etc.). This is due to my attempt to stick to the S&P methodology of dividing the total dividends paid over the last twelve months by the market capitalization of the company twelve months ago.
- For the 24 companies with a negative buyback yield, it means they issued more shares than they bought back over the past twelve months. I found it fascinating that almost half of the top shareholder yielders in Canada were net issuers of shares.
- Buyback yield is pretty controversial as management teams have a history of buying their shares back at high prices and subsequently putting an end to share repurchase programs when shares are trading cheaply. For buyback yield to useful on its own, you'd likely have to pair it with a valuation metric.
- Although I find it admirable that Valeant has successfully paid down so much of their debt, they still have about USD 30M of debt and remain a very highly leveraged company (debt/EBITDA ~ 7X).
- Initially, I was impressed with companies like Thomson Reuters that have positive percentages in each of the three factors contributing to shareholder yield. Although, the more I reflect, I wonder if it doesn't make sense for their management teams to focus on maximizing the factor with the highest return (i.e. Spin Master whose sole focus is debt reduction).
- For shareholder yield to be a useful metric, you'd have to trend it over time. I noticed Suncor retired a nominal amount of shares over the past twelve months. However, they did a huge equity issue in the preceding twelve months that negates any positive buyback yield for a longer-term holder.
Does a high shareholder yield make you more or less likely to invest in a company?