To forecast share returns, count buy-backs as well as dividends

WHAT is the point of buying shares? Ultimately investors must hope that the cash they receive from the company will offer an attractive long-term return.

Over the long run, reinvested dividends rather than capital gains have comprised the vast bulk of returns. But since the 1980s American firms have increasingly used share buy-backs, which have tax advantages for some investors. Buy-backs have been higher than dividend payments in eight of the past ten years.

In a buy-back, investors receive cash for a proportion of their holdings. A new paper* in the Financial Analysts Journal argues that adding this to dividend receipts to calculate a total payout yield gives a better estimate of future returns than the dividend yield alone. It also reveals a much better match between stockmarket performance and overall economic growth.

Using data going back to 1871, the authors find that the average dividend yield has been 4.5% and the total payout yield 4.89%. Since 1970 the dividend yield has dropped to 3.03%, but the total payout yield has averaged 4.26%. Looked at on that basis, the overall income return from shares has been not that far below historical levels.

The return from shares can be broken down into three components: the initial income yield; growth in the income stream; and any change in valuation. (If shares become more…Continue reading

This post was originally published in the Economist.

Advertisements
To forecast share returns, count buy-backs as well as dividends

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s