Portfolio Manager Tim Collard explores shareholder yield and examines the pros and cons of capital allocation through dividends and share buybacks.
Catalysts in play: How well a company allocates capital is a key indicator of its efficiency and future profitability. But if a business is reasonably consistent in generating earnings and cash flow, and has excess capital after reinvesting in itself, what is the most efficient way to return that capital to shareholders?
Entry points: For companies with excess capital whose balance sheets are in good standing, there are really two options: dividend payouts and share repurchases. Each has its pluses and minuses, but only one can create long-term shareholder value.
- The pros and cons of dividends: Dividends can provide an income stream, which may be attractive for investors. But dividends also essentially create a fixed commitment for company management, and they may not be the best allocation of capital at all times. Plus, dividends are taxed at both the corporate and individual levels, while their payouts also present reinvestment risks for shareholders.
- The case for stock buybacks: If you invest in a company that repurchases its shares, you will gradually own a bigger piece of that business—and its earnings—over time. If, for instance, you hold stock in a business that repurchases 5% of its shares every year for five years, your ownership will effectively increase 30%, without investing any additional capital. The longer the company’s repurchase program runs, the more compelling the math behind this phenomenon gets.
- The best of both worlds: Companies in the Russell 3000® Index that paid dividends and repurchased shares—in other words, companies that offer attractive shareholder yield—have outperformed those that only paid dividends over the past 1-, 3-, 5-, and 10-year time frames.
Shareholder-friendly capital allocations: At Boston Partners, our security selection process is rooted in our “Three Circle” approach, which targets stocks with attractive valuations, strong business fundamentals, and catalysts for positive change. Understanding how management allocates capital is a key component of our “fundamental” circle. To the extent there is excess capital and valuations are reasonable, we’d prefer to align ourselves with businesses and management teams that recognize the long-term value and compounding nature of consistent share repurchases.
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Boston Partners Global Investors, Inc. (“Boston Partners”) is an Investment Adviser registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. Registration does not imply a certain level of skill or training. Boston Partners is an indirect, wholly owned subsidiary of ORIX Corporation of Japan (“ORIX”). Boston Partners is comprised of two divisions, Boston Partners and Weiss, Peck & Greer Partners (“WPG”).
Securities cited are to illustrate our investment process and analysis only and should not be considered a solicitation to buy or an offer to sell a security. The specific securities listed do not represent all of the securities purchased, sold, or recommended for advisory clients. You should not assume that investments in the securities identifi ed and discussed were or will be profitable.
This video is not an offering of securities nor is it intended to provide investment advice. It is intended for information purposes only.
Terms and Index Definitions
Russell 3000® Index: The Russell 3000® Index measures performance of the 3,000 largest U.S. companies based on total market capitalization. The Russell 3000® Index measures performance of the 3,000 largest U.S. companies based on total market capitalization.
Free Cash Flow Yield: A financial solvency ratio that compares the free cash flow per share a company is expected to earn against its market value per share. The ratio is calculated by taking the free cash flow per share divided by the current share price.
