The stock market could get volatile, but while it does, companies returning large sums of cash to shareholders can pad investors’ returns.
The newest risk is that the current banking problems will reduce bank lending and lead to a slowing economy.
That makes owning shares in companies that are returning a lot of cash to investors attractive. While the price of many stocks whipsaw up and down, owning cash-returning companies can allow an investor to be less sensitive to the price. Dividends allow for some yield relative to the price paid for a stock. Plus, share buybacks reduce the number of shares outstanding, increasing earnings per share and supporting the share price, even if it still wobbles around a bit. Overall, the total return—price movements plus dividends paid—could be solid for high cash-returning companies.
One way to assess the attractiveness of a cash-return stock is by looking at the total cash-return yield. That’s the dividend payment plus buyback dollars as a percentage, or yield, of the company’s market capitalization. If that yield is far above the yield on the safe 10 year Treasury bond of roughly 3.5%, buying the stock could be worth the risk.
Those yields are unattractive in some sectors, so investors can weed those out. Consumer staples and utilities, for example, have already been bid upward because sales in those sectors tend to hold up well when the economy hits a rough patch, so the dividend plus buyback dollars don’t yield much relative to their market caps. In fact, those yields are less than the 10 year yield, according to 22V Research.
Other sectors offer yields that look better than they actually may be. The highly cyclical S&P 500 energy sector, which sees sales earnings rise and fall quickly with the economy, has an aggregate total cash return yield of about 10% right now. But if the economy takes a turn for the worst, energy prices could drop, sending earnings way down—and forcing companies to reduce the amount of cash they return to stockholders.
There are, though, sectors that offer yields that are more than acceptable versus government bonds—and that come with less risk.
The S&P 500 media sector is one. Many of those companies are large, mature, that regularly return cash to investors and that trade cheaply. That means their cash flows relative to their market caps are fairly high. The S&P 500 media sector’s aggregate cash returns this year should be roughly 10% of the aggregate market cap. That’s more than 6 percentage points above the 10 year yield.
One example is
Comcast
(CMCSA). It’s on pace to buy about $14 billion of its own stock this year, as of its most recent reported quarter. It’s also expected to return about $4.89 billion in dividends, for total returns of about $18.89 billion. That’s roughly 12% of its relatively massive market cap.
Juicy yields are also found in the insurance business. Similar to media, S&P 500 insurers are large, mature and they trade cheaply. Total cash returns are expected at just over 6% for this year, still well above the 10-year yield.
An example is
Prudential Financial
(PRU). As of its most recent quarter, annual buybacks are on pace for about $1.5 billion, while dividends are on pace for about $1.8 billion. The total cash return of around $3.29 billion is just around 11% of its just under $30 billion market cap.
Don’t just dash for cash. Dash for cash-return stocks.
Write to Jacob Sonenshine at jacob.sonenshine@barrons.com
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