Beating the Market via Dividends and Buybacks

NEW YORK ( TheStreet) -- I'm always on the lookout for value-related search criteria that exhibit potential for good performance, and last August I extolled the potential virtues of companies that are simultaneously buying back stock and paying dividends.

I've long been a fan of companies that increase their dividends, primarily because dividends don't lie and can't be manipulated the way earnings can.

Rising dividends also indicate some level of confidence by management, at least in my view.

In terms of buybacks, I am not interested in companies that announce repurchase programs and don't follow through on them.

But adding the buyback criteria where companies have actually repurchased stock, seemed an interesting way to strengthen the search.

Nine months since that original column ran, I am encouraged by the early results. (I preface that with the word "early" as nine months is but a day to us value investor types.)

By way of reminder, the screen I used included the following criteria:
  • Minimum Market Cap: $2.5 billion.
  • Increasing dividends for each of the past seven years.
  • Minimum dividend yield of 2%.
  • Decrease in shares outstanding of at least 5% in the past year.

Just 19 names made the cut with this fairly stringent search, but the results since last August have me convinced that this is a concept worth pursuing further. Just one name, Intel ( INTC) was in negative territory, down 4.2%. The average return for the 19 qualifiers was a fairly compelling 25.4%, easily beating the S&P 500 (up 16.6%) and the Russell 2000 (up 21%).

The biggest gainers included Lowe's ( LOW) (up 65.2%), Ameriprise Financial ( AMP) (up 54%), Safeway ( SWY) (up 51.4%), Assurant ( AIZ) (up 46.6%) and Walgreen ( WAG) (up 41.8%).

Interestingly, there were no home runs and no terrible performers. There was just a boatload of singles and doubles, and that's all you really need.

LOW Chart LOW data by YCharts

Granted, this group of companies performed better than the markets in very positive market conditions, but I would be very curious to see how they'd perform in more negative conditions.

Given the dividend yield of the group, which was just a bit more than 3% when I wrote the original column, I'd expect better than market performance on the downside too, but I haven't been able to put this theory to the test -- not that I'm hoping for that opportunity. However, sooner or later it will happen, and we'll obtain the evidence as to whether this is a decent strategy in up and down markets.

Rounding out the list of 19 qualifiers were Exxon Mobil ( XOM), Conoco Phillips ( COP), Lockheed Martin ( LMT), Raytheon ( RTN), Northrop Grumman ( NOC), L-3 Communications ( LLL), CSX ( CSX) and Norfolk Southern ( NSC), Travelers ( TRV), Chubb ( CB), McGraw Hill ( MHP), Becton Dickinson ( BDX) and Darden Restaurants ( DRI).

Not all stock screens that I've devised and used during my career have stood the test of time; sometimes they are just lucky and the luck does not last. We'll have to see if the combination of dividend growth and stock buybacks can indeed stand the test of time.

At the time of publication, Heller had no positions in stocks mentioned.

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Jonathan Heller, CFA, is president of KEJ Financial Advisors, his fee-only financial planning company. Jon spent 17 years at Bloomberg Financial Markets in various roles, from 1989 until 2005. He ran Bloomberg's Equity Fundamental Research Department from 1994 until 1998, when he assumed responsibility for Bloomberg's Equity Data Research Department. In 2001, he joined Bloomberg's Publishing group as senior markets editor and writer for Bloomberg Personal Finance Magazine, and an associate editor and contributor for Bloomberg Markets Magazine. In 2005, he joined SEI Investments as director of investment communications within SEI's Investment Management Unit.

Jon is also the founder of the Cheap Stocks Web site, a site dedicated to deep-value investing. He has an undergraduate degree from Grove City College and an MBA from Rider University, where he has also served on the adjunct faculty; he is also a CFA charter holder.

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