Investors love companies that pay dividends. But dividends aren’t the only way firms send money to shareholders. They can also buy back their own stock.
Companies that aggressively repurchase their shares tend to outperform the market according to money manager James O’Shaughnessy. In his book What Works on Wall Street, he looked at the efficacy of using buyback yield, the percentage of shares a company redeemed over the last year, to pick stocks.
A portfolio made up of the 10% of stocks with the highest buyback yields, rebalanced each year, was the best performer over the long term. It gained an average of 13.7% annually from 1927 through to the end of 2009. In comparison, the market gained 10.5% per year over the same period and stocks with the lowest 10% of buyback yields climbed only 5.9% per year.
The results inspired me to look at the buyback yields offered by this week’s Safer Canadian Dogs.
Telus was the buyback champ over the last year because it shrank its share count by 4.4%. CIBC took second spot by knocking its share count down 1.3% over the same period. In addition, Potash and the Bank of Montreal both redeemed 1.0% of their shares.
In the middle of the pack, Rogers, Canadian Oil Sands, and BCE all changed their share counts by less than 0.1% over the last year.
On the other hand, Fortis swelled its share count by a whopping 11.3% over the last 12 months. Shaw was another big offender due to its 2.1% share growth. National Bank saw its share count rise by 1.0%.
Investors should generally favour companies with high dividend yields and high buyback yields. The best of the Safer Canadian Dogs, on a combined yield basis, are: Telus, Canadian Oil Sands, CIBC, BCE, and the Bank of Montreal.
The worst, by far, are Fortis and Shaw.
Safer Canadian Dogs
Investors following the Dogs of the Dow strategy want to buy the 10 highest yielding stocks in the Dow Jones Industrial Average (DJIA), hold them for a year, and then move into the new list of top yielders.
The Dogs of the TSX works the same way but swaps the DJIA for the S&P/TSX 60, which contains 60 of the largest stocks in Canada.
My safer variant of the Dogs of the TSX tracks the 10 stocks in the index with the highest dividend yields provided they also pass a series of safety tests, such as earning more than they pay in dividends. The idea is to weed out companies that might cut their dividends in the near term. Just be warned, it’s a task that’s easier said than done.
|Name||Price||P/B||P/E||Earnings Yield||Dividend Yield|
|CANADIAN OIL SANDS (COS)||$23.37||2.38||13.67||7.32%||5.99%|
|NATIONAL BANK (NA)||$46.57||1.91||10.73||9.32%||4.12%|
|BANK OF MONTREAL (BMO)||$80.09||1.74||12.32||8.12%||3.90%|
Source: Bloomberg, July 14, 2014
-Price: Closing price per share
-P/B: Price to Book Value Ratio
-P/E: Price to Earnings Ratio
-Earnings Yield: Earnings divided by Price, expressed as a percentage
-Dividend Yield: Expected-Annual-Dividend divided by Price, expressed as a percentage
-Norm may own some of the stocks mentioned
As always, do your due diligence before rushing out any buying any stock, including those featured here. Make sure its situation hasn’t changed in some important way, read the latest press releases and regulatory filings and take special care with stocks that trade infrequently. Be careful out there.
New & Noteworthy
Newsletter tracker Mark Hulbert takes a quick look at what six measures of the market have to say about the state of U.S. stocks. Fully five of the six have hit alarmingly high levels. But the market’s price-to-earnings ratio remains merely moderately high.
Overall, that’s not good news for buyers. But it’s great news for sellers.
Just For Frugal Fun
Doug Immel lives in a little house near Providence, Rhode Island that cost him just $28,000. On the downside, it only provides 164 square feet of living space. But the frugal living arrangements should cut his time to retirement in half.
Would you live in a house the size of a horse trailer to retire earlier?
Norm Rothery, CFA, PhD, is the founder of StingyInvestor.com