Latest / Masters in Business / At the Money: Getting More Out of Dividends with Shareholder Yield

Transcript

At the Money: Getting More Out of Dividends with Shareholder Yield · Masters in Business

• 0:02
  Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
• 0:22
  Speaker 2: Dividend investing has a long and storied history. A substantial
• 0:27
  Speaker 2: percentage of market returns are due to the impact of
• 0:31
  Speaker 2: reinvested dividends compounding over time. But it turns out dividends
• 0:37
  Speaker 2: are only part of the picture driving stock returns. Shareholder yield,
• 0:42
  Speaker 2: as it's become known, includes dividends, but also share buybacks
• 0:47
  Speaker 2: and debt paydowns as indicators of future gains. I'm Barry Ritholtz,
• 0:53
  Speaker 2: and on today's edition of At the Money, we're going
• 0:56
  Speaker 2: to discuss how you can participate in shareholder yield and
• 1:00
  Speaker 2: get more out of dividends. To help us unpack all
• 1:03
  Speaker 2: of this and what it means for your portfolio, let's
• 1:06
  Speaker 2: bring in MEB Faber, founder and CIO of Cambria. The
• 1:10
  Speaker 2: firm manages numerous ETFs, including those that focus on shareholder yield,
• 1:15
  Speaker 2: and is approaching three billion dollars in client assets. He
• 1:19
  Speaker 2: is the author of Shareholder Yield, A Better Approach to
• 1:22
  Speaker 2: Dividend Investing, just out in its second edition this week.
• 1:27
  Speaker 2: So MAB, let's start with the basics. How do you
• 1:29
  Speaker 2: define what shareholder yield is?
• 1:32
  Speaker 3: Most common definition is total cash payout meaning cash dividends
• 1:38
  Speaker 3: plus net stock buybacks. Net being a very key word
• 1:43
  Speaker 3: there because it incorporates not just stock buybacks but also
• 1:47
  Speaker 3: share issuance. So think about just dividends and buybacks. That's
• 1:50
  Speaker 3: what most people think of when they think of shareholder yield.
• 1:53
  Speaker 2: Huh. Interesting. Why should companies that are returning cash to
• 1:57
  Speaker 2: investors through either dividends or buybacks be attractive to investors?
• 2:02
  Speaker 3: There's a lot of coinherited traits for a company that's
• 2:05
  Speaker 3: paying dividends or buying back shares. The biggest is they
• 2:09
  Speaker 3: have to have the cash in the first place. So
• 2:11
  Speaker 3: if you're paying out a ten percent yield, then likely
• 2:15
  Speaker 3: you either have a ton of cash flow or more
• 2:18
  Speaker 3: cash than you know what to do with. A good
• 2:21
  Speaker 3: traditional case study would be Apple, who did both. They
• 2:24
  Speaker 3: pay out patch dividend and they do a stock buyback,
• 2:27
  Speaker 3: and the summation of the two is really the combination.
• 2:30
  Speaker 3: Being agnostic the holistic that matters.
• 2:33
  Speaker 2: So what does the research, and I know you spend
• 2:35
  Speaker 2: a lot of time doing academic research, what does it
• 2:38
  Speaker 2: suggest about higher yielding stocks versus stocks that have little
• 2:43
  Speaker 2: to no yield.
• 2:45
  Speaker 3: First of all, investors love dividends, there's probably no more
• 2:49
  Speaker 3: time honored tradition than people getting that quarterly dividend check.
• 2:55
  Speaker 3: Passive income people fantasize about sitting on the beach, drinking
• 2:59
  Speaker 3: pina coladas and cabo and getting that dividend check. But
• 3:03
  Speaker 3: you have to account for structural changes in markets, and
• 3:06
  Speaker 3: really starting in the nineteen eighties and accelerating in the
• 3:09
  Speaker 3: nineteen nineties, companies started buying back more stock than they
• 3:13
  Speaker 3: start than they paid out in cash dividends, and any
• 3:16
  Speaker 3: given year since then, there's been more buybacks. So investors
• 3:19
  Speaker 3: that focus only on dividends historically now miss over half
• 3:24
  Speaker 3: of the picture on how companies distribute their cash. This
• 3:29
  Speaker 3: is also important because of the standpoint of companies that
• 3:32
  Speaker 3: issue shares. So you think the companies in my home
• 3:36
  Speaker 3: state of California, the tech companies that love to make
• 3:38
  Speaker 3: it rain to executives and c suite with stock based compensation.
• 3:44
  Speaker 3: So avoiding the companies that have a negative yield, meaning
• 3:47
  Speaker 3: they're diluting investors every year is important too. And so
• 3:51
  Speaker 3: if you do the combination of these two factors and
• 3:54
  Speaker 3: look at it in history, it's really been the premier
• 3:56
  Speaker 3: way to look at value investing for the past one
• 3:59
  Speaker 3: hundred years really interesting.
• 4:01
  Speaker 2: So if a company has some extra cash on hand,
• 4:05
  Speaker 2: are they better off raising their dividends, doing a new buyback,
• 4:09
  Speaker 2: or a combination of both.
• 4:12
  Speaker 3: The answer is it depends. You know, the job of
• 4:14
  Speaker 3: a CEO is really to maximize the return on investment.
• 4:17
  Speaker 3: There's only five things a company can do with its cash.
• 4:20
  Speaker 3: That's the menu. There's no secret in and out menu here, right.
• 4:23
  Speaker 3: It's they can pay out a dividend, they can buy
• 4:25
  Speaker 3: back stock, they can pay down debt if they have it,
• 4:28
  Speaker 3: they can go merge or acquire another company. And then
• 4:31
  Speaker 3: the last one, which is what everyone spends ninety nine
• 4:33
  Speaker 3: percent of the time focusing on, is reinvest in the
• 4:36
  Speaker 3: business R and D. So what new iPhone are we launching,
• 4:39
  Speaker 3: what new chip is Nvidia doing? What new service are
• 4:41
  Speaker 3: we offering? But really it's the job of the CEO
• 4:44
  Speaker 3: to maximize those five levers. And in some cases, if
• 4:48
  Speaker 3: you look at someone like Apple, you get to be
• 4:50
  Speaker 3: so big and you have so much cash and money
• 4:52
  Speaker 3: you simply can't spend it. Now, you probably could in
• 4:55
  Speaker 3: a Brewster's million sort of way, but it wouldn't be
• 4:57
  Speaker 3: beneficial to shareholders. You see a lot of company that
• 5:00
  Speaker 3: do that, they spend the money, but in a way
• 5:04
  Speaker 3: that doesn't maximize the ROI.
• 5:06
  Speaker 2: So let's talk a little bit about shareholder yield across
• 5:10
  Speaker 2: different market caps. Does it matter if you're a large
• 5:14
  Speaker 2: cap or a medium or a small and how do
• 5:17
  Speaker 2: you guys think about different sized companies and their shareholder yield.
• 5:22
  Speaker 3: When we wrote this book a decade ago, you know,
• 5:25
  Speaker 3: we looked at the historical returns of shareholder yield companies
• 5:28
  Speaker 3: and it turned out that shareholder yield beat any dividend
• 5:32
  Speaker 3: strategy we could come up with high dividend yield, dividend growth.
• 5:35
  Speaker 3: It beat the market on and on, and we saw
• 5:36
  Speaker 3: it as really the premiere factor. Now we didn't invent this.
• 5:40
  Speaker 3: Jim O'Shaughnessy our but has talked a lot about this
• 5:42
  Speaker 3: in his classic book William Priest and Others. But modeling it,
• 5:46
  Speaker 3: we saw that it made the most sense of any
• 5:48
  Speaker 3: strategy we could find. It worked in large cap, it
• 5:51
  Speaker 3: worked in small cap, it worked in foreign and worked
• 5:54
  Speaker 3: in emerging. If you have any investing factor or any strategy,
• 5:57
  Speaker 3: you want it to work most of the place, most
• 6:00
  Speaker 3: of the time. Right, So if it works in US
• 6:03
  Speaker 3: but not in Japan, that's problem. If it works in
• 6:04
  Speaker 3: small cap but not large cap, that's a problem. And
• 6:07
  Speaker 3: the beauty of this strategy it's not only worked since
• 6:09
  Speaker 3: the publication of the book, but it's worked as far
• 6:13
  Speaker 3: back as you can take it, and it's very, very consistent.
• 6:17
  Speaker 3: So it really captures a number of factors and characteristics,
• 6:23
  Speaker 3: the main one of course being value and quality, which
• 6:25
  Speaker 3: has been hard to keep up. You know, the romping,
• 6:27
  Speaker 3: stomping SMP of the past fifteen years has creamed everything,
• 6:30
  Speaker 3: but shareholder yield across categories right now in twenty twenty four,
• 6:38
  Speaker 3: because of the valuation gap looks about the best it's
• 6:40
  Speaker 3: ever looked over the past decade.
• 6:42
  Speaker 2: So discussing cap size, you have a shareholder yield ETF
• 6:47
  Speaker 2: for large cap, for mid, and then a combined small
• 6:50
  Speaker 2: cap and microcap, and from what I've seen over the
• 6:53
  Speaker 2: past few years, they've beaten the s and P. If
• 6:56
  Speaker 2: you go back ten or twenty years, the SMP is
• 6:58
  Speaker 2: still slight performing. But let's talk about geography. Those three large, mid,
• 7:04
  Speaker 2: and small are all US based. You also have an
• 7:08
  Speaker 2: international version and an emerging markets version. Tell us about
• 7:13
  Speaker 2: overseas shareholder yield.
• 7:15
  Speaker 3: So if you look at across all five of these funds,
• 7:17
  Speaker 3: the average stock coming in has a double digit shareholder yield.
• 7:21
  Speaker 3: And let that sink in for a second. SMP is
• 7:23
  Speaker 3: yielding what one point three percent dividend yield right now,
• 7:26
  Speaker 3: and so ignoring buyback yield is a huge mistake, particularly
• 7:30
  Speaker 3: in the US. The US is very corporate buyback focus,
• 7:34
  Speaker 3: so the majority of the shareholder yield in the US
• 7:36
  Speaker 3: comes from the buyback yield. Again, we're talking about ten
• 7:39
  Speaker 3: percent yields coming in. In foreign developed and emerging that
• 7:43
  Speaker 3: tends to be closer to fifty to fifty dividends and buybacks,
• 7:46
  Speaker 3: So you'll see a higher five six percent dividend yield
• 7:49
  Speaker 3: in those geographies, largely because they have a culture of
• 7:52
  Speaker 3: paying cash dividends more than buybacks, although that is changing.
• 7:55
  Speaker 3: You're seeing in particular countries like Japan really start to
• 7:59
  Speaker 3: ramp up their buy back focus. And to be clear,
• 8:02
  Speaker 3: when you talk about buybacks, there's so much misinformation. Oh
• 8:05
  Speaker 3: my goodness. The number one thing is if you frame
• 8:08
  Speaker 3: buybacks simply as tax efficient dividends or flexible dividends, it
• 8:14
  Speaker 3: changes your entire perspective across all of this, and nobody
• 8:18
  Speaker 3: understood that understands this better than Warren Buffett. Warren Buffett
• 8:21
  Speaker 3: has been talking about buybacks since the nineteen eighties. Right
• 8:24
  Speaker 3: his famous quote on Bircher, he says, Bircher's never paid
• 8:27
  Speaker 3: a dividend. It once paid a ten cent dividend in
• 8:30
  Speaker 3: the sixties, and I must have been in the bathroom, right,
• 8:32
  Speaker 3: So he gets it. He gets it on buybacks. On average,
• 8:35
  Speaker 3: if a stock is cheap, a buyback is a great
• 8:38
  Speaker 3: use of cash. You can buy a dollar for eighty
• 8:41
  Speaker 3: cents for fifty cents, and then that's what you see
• 8:43
  Speaker 3: in the portfolios across the shareholder yield lineup. The price
• 8:47
  Speaker 3: earnings ratios, the cash flow ratios are at a significant
• 8:52
  Speaker 3: discount to the S and P five Fronter, but also
• 8:54
  Speaker 3: the categories these funds tend to be in. We're talking
• 8:57
  Speaker 3: single digit PE ratios, which is a gap that has
• 9:01
  Speaker 3: widened over the past decade, but in particularly the last
• 9:05
  Speaker 3: three to four years with some of the largest valuation
• 9:08
  Speaker 3: spreads we've seen. So it's a particularly attractive time, we think,
• 9:11
  Speaker 3: to be in shareholder yield stocks.
• 9:13
  Speaker 2: So who is the typical buyer of any of these
• 9:16
  Speaker 2: shareholder yield dtfs? Are they traditional value and dividend investors,
• 9:22
  Speaker 2: who do you see as purchasing your funds.
• 9:26
  Speaker 3: It's a little bit of everything. You have advisors that
• 9:30
  Speaker 3: think in the style boxes, so they're making substitutes like
• 9:33
  Speaker 3: a lego. You have individual investors, you have institutions that
• 9:36
  Speaker 3: are simply looking for a better approach to not just
• 9:39
  Speaker 3: income but just equity investing in general. What's interesting is
• 9:43
  Speaker 3: you have a lot of investors in this cycle that
• 9:45
  Speaker 3: have shied away from foreign and emerging markets. How many
• 9:48
  Speaker 3: times have you heard I don't trust the numbers, I
• 9:51
  Speaker 3: don't believe in emerging markets what they're doing. And our
• 9:54
  Speaker 3: emerging market fund is actually our second biggest fund. And
• 9:56
  Speaker 3: what's interesting about emerging markets. If your company that paying
• 10:00
  Speaker 3: out ten percent of your market cap and dividends or
• 10:04
  Speaker 3: buying back shares, you know what you're not doing with
• 10:06
  Speaker 3: that money is squandering it. You're not naming stadiums, you're
• 10:10
  Speaker 3: not buying jets, you're not doing bribes, on and on.
• 10:13
  Speaker 3: You have to have the cash to be able to
• 10:15
  Speaker 3: pay it out. So by definition, this type of strategy
• 10:18
  Speaker 3: is a quality strategy, so it avoids a lot of
• 10:22
  Speaker 3: those types of companies. And one more comment, So traditionally
• 10:25
  Speaker 3: in the US. This tends towards sectors like financials and energy,
• 10:30
  Speaker 3: and that's true across all the geographies currently. And people say, mam,
• 10:35
  Speaker 3: you're missing out. You're missing out on the tech AI
• 10:38
  Speaker 3: boom in the US. You have a very low tech
• 10:40
  Speaker 3: exposure in the US, and that's true. Part of that
• 10:42
  Speaker 3: is the tech companies are expensive, and they also are
• 10:45
  Speaker 3: doing a lot of share issuance and emerging markets tech
• 10:47
  Speaker 3: is the largest sector.
• 10:49
  Speaker 2: Wow.
• 10:49
  Speaker 3: And so part of that is simply because emerging markets
• 10:51
  Speaker 3: are down so much, but also they have a very
• 10:54
  Speaker 3: high shareholder yield there as well. Huh.
• 10:57
  Speaker 2: Really interesting. So to wrap up, investors who might traditionally
• 11:01
  Speaker 2: have been straight divenend buyers should be considering shareholder yield dtfs.
• 11:07
  Speaker 2: It gives them the full benefit of management that's trying
• 11:11
  Speaker 2: to return the most amount of cash back to shareholders
• 11:15
  Speaker 2: through both divin ends and the more tax efficient stock
• 11:19
  Speaker 2: buybacks too. I'm Barry Retolts, and this is Bloomberg's at
• 11:23
  Speaker 2: the Money