Looking for stocks with attractive and sustainable dividend yields is a popular investment strategy. Many investors like to count on that steady income.
But total yield, which combines company’s share repurchases with its dividend, is worth considering as well.
High-yield stocks tend to have a value bent. But looking for companies that repurchase 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.”
In theory at least, the benefit of a stock buyback is that it reduces the share count, thereby increasing earnings per share. Many companies, however, issue additional shares so the buyback doesn’t always lower the share count.
Senyek and several colleagues published a note Friday that includes a list of larger U.S. stocks with a total yield of more than 7%. Their stock screen eliminated any companies with debt-to-Ebitda (earnings before interest, taxes, depreciation, and amortization) ratios above 3.5.
Senyek says that these stocks are well-fortified to outperform over the next year.
They have stability and income, which does well in an economic slowdown, he says, adding that “they offer some overall defensive characteristics.”
Several companies on Wolfe’s list tilted heavily to buybacks.
(ticker: AZO), for example, has a total yield of 10.7%, but it comes entirely from share repurchases.
Barron’s decided to highlight a few companies that have been fairly balanced in how they return capital to shareholders via dividends and buybacks—
Bristol Myers Squibb
Prudential Financial, a large insurer and asset manager, has a total yield of 7.9%—4.7% for its dividend and 3.2% for buybacks. Most of the companies Wolfe Research cited have higher buyback yields, testament to the popularity of that approach.
Prudential’s FactSet consensus 2023 earnings estimate is $11.93 on an adjusted basis, up from an expected $9.54 when it reports its 2022 profits on Feb. 7.
Earnings growth often translates into higher cash flow, which funds higher capital returns.
Wells Fargo sports a total yield of around 9.8%—7.2% for buybacks and 2.6% for dividends.
The large national bank, based in San Francisco, is expected to earn $4.80 a share this year, compared with $3.14 in 2022.
Pharmaceutical company Bristol Myers Squibb sports a total yield of 9%, with 3.2% coming from the dividend. Buybacks account for 5.8%.
The company is expected to earn $8.09 a share this year on an adjusted basis, up from $7.70 in 2022.
Darden Restaurants has a total yield of 8.3%. Buybacks account for 5% with the remaining 3.3% coming from the dividend. The company is expected to earn an adjusted $7.84 a share in its current fiscal year, which ends in May, up from $7.40 previously.
Webster Financial, a regional bank based in Stamford, Conn., has a total yield of 7.9%, with buybacks accounting for 4.9%. The dividend yield was 3%.
Analysts polled by FactSet expect the company to earn an adjusted $6.83 a share this year, up from $5.59 in 2022.
One of the advantages is buybacks is that they can be adjusted quickly from quarter to quarter. A dividend cut, in contrast, is often treated harshly by the market.
As a result, total yield companies “have more flexibility to throttle back capital returns as needed to offset weakness in cash flows,” says Senyek.
Write to Lawrence C. Strauss at email@example.com