The Book ‘Share Holder Yield-A Better Approach to Dividend Investing’ is written by well known researcher and fund manager Mebane Faber.
The # 1 job of a CEO is capital allocation.The way he allocates capital determines the success of the company and hence the stock price.
A CEO can deploy capital in only 5 ways:
1.Invest in Existing Operations
2.Acquire other businesses
3.Pay down debt
4.Pay dividends
5.Buy back shares
The Book uses Options 3,4 and 5 to determine the attractiveness of the stock from an investment perspective.
Some financial terms to be noted here:
Dividend Yield=(Trailing 12 months cash dividends)/Market Cap
Net Buyback Yield=(Trailing 12 Months Stock Repurchases-Stock Issuances)/Market Cap
Net Debt Paydown Yield =(Net changes in short &long term debt)/ Market Cap
Shareholder Yield= Dividend Yield+Net Buyback Yield+Net Debt Paydown Yield
Generally,people who invest for dividends use dividend yields as their sole criteria.
While this was an effective tool in the past, changes in the tax structure have made this less tax efficient companies.In the Indian context, we have seen large payouts to shareholders by companies like TCS,Infosys, Wipro etc by buybacks and not dividends.
Net debt payout is also important for shareholders as lesser the debt,lesser the interest costs and more claims of the shareholders on future cash flows.
Hence the author feels a combination of all three gives rise to a better way of measuring the payout to shareholders.
In his research, the author finds that using Shareholder Yield as a way to screen,rank and select stocks offers superior returns with lower drawdowns than just index investing or any of the other methods used alone.
Do buy the book if interested in quantitative methods of stock selection.
