BALTIMORE (Stockpickr) --Dividends are so 2013. There's a different payout metric you should be using this year: shareholder yield.
January was a wakeup call for any investors who'd eschewed dividend payouts in favor of capital gains. Oh yeah, stock gains don't always ring in like clockwork, do they? Suddenly, the value that firms can pay shareholders directly mattered again. The problem is that a stock's dividend yield just doesn't tell the whole story.
For real market beating returns, you've got to look at "shareholder yield."
Shareholder yield focuses on measuring all the different ways that a company can return cash to its shareholders. Yes, that includes dividends -- but it also includes share buybacks and paying down debt.
In a nutshell, shareholder yield is made up of moves that directly return cash or equity to your portfolio.
Any of those three corporate actions can unlock significant value for shareholders, and the data backs it up. According to research by Cambria Investment Management CIO Mebane Faber, shareholder yield historically generates bigger returns than dividends alone. Much bigger returns.
With low interest rates and record levels of cash sitting on corporate balance sheets, management teams are looking for the most effective ways to return value to shareholders. It's not one size fits all, either. The best mix varies from company to company. But by looking at the trifecta of dividends, buybacks and debt extinguishment, you can be sure that you won't miss out on any of the proceeds.
With that in mind, here's a look at five names that have provided superior shareholder yield in the last year.
There's an interesting story in shares of technology giant Hewlett-Packard (HPQ). This $57 billion computer company has caught considerable attention in the last couple of years for its biggest missteps, including the $11 billion acquisition of Autonomy, which destroyed considerable shareholder value. But investors have been ignoring the leaps and bounds H-P has made in the years since.
They've also been ignoring the hefty 13.33% shareholder yield shares have returned in the last year.
Hewlett-Packard is best known for its printer and PC businesses, units that generate around half of overall sales. The problem is that PCs are commoditized these days -- they've become a volume product, not a margin product. And that shift means that Hewlett-Packard has had to change its business materially in recent years. The firm has done an admirable job of moving more revenues to services, hardware and software for enterprise customers. Likewise, printers still provide attractive consumables sales -- printer ink is liquid gold to H-P.
Hewlett-Packard's real problem in recent years has been too much money. The firm entered 2010 with more than $13 billion in cash on its balance sheet, and the need to distance itself from the PC business. That's why management went on an ill-fated buying spree. But more recently, a combination of dividend payouts, share buybacks, and debt extinguishment has helped put $7.53 billion in investors' pockets.
That's a much better use of capital -- and it points to upside in H-P, particularly given its dirt-cheap valuation at current prices.
Video game maker Activision Blizzard (ATVI) pays out an unremarkable 1% dividend yield at current price levels, but that leaves out most of the value that management has returned to shareholders in the last year. Add buybacks to the picture, and ATVI returned $1.22 billion to investors in the last year for a whopping 9.03% shareholder yield.
Activision Blizzard is one of the biggest video game makers in the world, with a portfolio of wildly successful (and addictive) games. ATVI's franchises include Call of Duty, World of Warcraft, and Diablo, brands that generate blockbuster titles on a regular basis. But Activision's best attribute isn't its portfolio -- it's the firm's subscription model for online multiplayer games such as World of Warcraft. In the case of WoW, some 8 million subscribers shell out a monthly fee to play the game with others in real time. The result is a large chunk of high-margin recurring revenue. Better yet, that revenue is extremely sticky thanks to the huge sunk cost players invest in building out their characters in the game.
ATVI has flirted with bringing that pricing model to other more conventional franchises, such as Call of Duty. If they can pull it off, it'll be a coup for the gaming industry. ATVI's balance sheet took on $4.6 billion in debt in the last two years, but it still carries enough cash to completely offset those borrowings.
In the near-term, momentum looks on the side of ATVI investors.
Apparel retailer Gap (GPS) has been executing in a big way over the last couple of years, without much fanfare. But the proof is in the firm's $15.65 billion in revenues for the year ending last February. Shares of Gap have rallied 31% in the last 12 months, but shares still havent gotten rich in valuation. Better, management has paid an 8.53% shareholder yield on top of it all.
Gap is a mall staple store, selling upmarket apparel to mass-affluent consumers. That positioning gives Gap access to the golden goose of buyer demographics. But Gap goes beyond its namesake store; the firm also owns Old Navy, Banana Republic, Piperlime and Athleta. Those brands give gap a diversified reach into other buyer groups, and spread the business across more than 3,000 company-owned stores. Gap's international growth strategy is a model for low-risk/high-return: the firm has 500 franchised stores in markets like the Middle East and South Asia, spots where GPS' operational expertise is handed off to store owners who take the risks but need to buy inventory from Gap.
Strong margin has contributed to a strong balance sheet at Gap. The firm carries $1.5 billion in cash on its books, with just $1.2 billion in debt. That's effectively no leverage for a retail name that's everywhere. Coupled with a P/E multiple of just 15, Gap looks cheap in 2014.
Bed Bath and Beyond
Bed Bath and Beyond (BBBY) is another best-in-breed retail name that's on our list of shareholder yield champs this week. If you focused solely on dividends, BBBY wouldn't even be on your radar; this $14 billion housewares retailer doesn't pay one. But that doesn't mean that the firm doesn't return capital to shareholders; $1 billion in share buybacks last year adds up to a 7.3% shareholder yield.
It's worth noting that debt extinguishment isn't an option for BBBY -- the firm doesn't have any debt.
Bed Bath and Beyond's flagship stores offer everything from kegerators, massage chairs, and other household gadgets to more non-discretionary items like sheets, pots, and pans. That combination has made BBBY successful at attracting shoppers and getting them to spend. Other store concepts like Buy Buy Baby, Cost Plus and Christmas Tree Shops are expanding the firm's core focus, and they provide one of the biggest opportunities for top line expansion right now. All told, the firm operates nearly 1,500 stores in North America.
That's particularly impressive: despite recent big acquisitions of new store brands and a huge footprint of real estate, BBBY has financed all of its growth through cash on hand and equity. That lack of a debt load means that shareholders claim a bigger piece of the pie -- and that pie looks underpriced right now. For all of BBBY's growth prospects, shares trade for just 13 times trailing earnings.
Last up is Deere (DE), the $32 billion tractor maker. Deere is a powerhouse in the agricultural and construction equipment industries. How many other equipment makers can sell hats with their logo to suburban kids? That brand value extends to Deere's core customers too. The firm has a reputation for building premium, quality equipment with an eye to the future.
For instance, Deere was one of the first tractor makers that offered GPS-powered field marking on its heavy equipment. That positioning helps Deere command higher prices than peers. And it's helped the firm command more than 50% of North America's agricultural market. Deere's machines aren't cheap -- far from it -- so it's used its captive finance arm much like automakers do, financing farmers' livelihoods at better rates than they'd find elsewhere. That huge financial exposure scared off a lot of investors during the Great Recession, but the combination of better underwriting standards that peers and the stellar value of the firm's collateral (its own machines) means that credit risks are overstated.
Growth in emerging markets is a big opportunity for Deere in the years ahead. As more countries adopt Western ag techniques, Deere's positioning as a high-end tractor maker should capture significant sales. Meanwhile, management has had shareholders in mind too. The firm returned a 7.11% shareholder yield to investors last year, far more than the dividend reveals.
To see these names in action, check out the Shareholder Yield Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.