BALTIMORE (Stockpickr) -- We've all heard the old story of equity market returns: averaged across the long run, the stock market pays out a solid 10% return each year. But that's chump change.
By focusing on just three simple metrics this year, you could nearly double those average gains. Best of all, you could do it at the exact same time that momentum names are losing steam this month.
So what the secret sauce I'm talking about? It's shareholder yield.
Shareholder yield focuses on measuring the three ways that a company can return cash to its shareholders. Yes, that includes obvious moves like dividends -- but it also includes share buybacks and paying down debt.
Translation: shareholder yield is made up of anything that directly returns 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 James O'Shaughnessy, over a 40-year period, large-cap stocks with the highest shareholder yield delivered average gains of 18.05%. That's almost double the returns that investing in the vanilla big index would have earned you.
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.
Illinois Tool Works
First up on our list of shareholder yield standouts is Illinois Tool Works (ITW), the $35 billion industrial conglomerate. Calling ITW diversified is an understatement the firm has more than 100 individual business units in 58 countries. And even that's a huge decrease from the firm's former scope. While ITW only pays a perfunctory 2% dividend yield, its payout looks a whole lot more impressive on a shareholder yield basis: the firm has returned 12.24% to investors in the last 12 months.
ITW's products run the gamut from the seat heater in your car, to the plastic beverage rings on a six-pack of sodas, to the commercial oven at your favorite restaurant and everything in between. Those businesses have actually been on the decrease in recent years, as ITW looks to simplify its structure from 800 individual subsidiaries to "just" 100. That change will allow ITW to focus on the businesses where it enjoys the biggest returns.
Historically, one of ITW's biggest advantages has been the fact that its management is decentralized while restructuring will move more processes to the home office, it won't change the fact that each unit is managed autonomously. Most of ITW's shareholder yield in the last year came from big share buybacks and debt extinguishments. Look for cost savings from the firm's long-term plan to materially boost profitability in the next three years.
Shares of CenturyLink (CTL) have been showing strength in a tough market this year: the $20 billion integrated communications stock has managed to push almost 6% higher since the calendar flipped to January, dramatically outpacing the barely 1% gain in the S&P 500 over the same stretch. And with a 10.6% shareholder yield in the past year, CTL is well positioned to keep driving gains to investors.
CenturyLink is the third-largest local phone company in the U.S., providing landline service to 13 million lines and internet access to another 6 million customers in 37 states. It's a mistake to think of CTL as a firm with a bunch of legacy assets: the firm lays claim to a 240,000 mile fiber optic network and 55 global datacenters, two businesses that should provide considerable growth in the years ahead, especially if CenturyLink can successfully leverage its huge customer rolodex from the fixed-line business.
While shares got cheaper after a recent dividend cut, the reality is the management was moving cash from one form of shareholder yield to another (share buybacks). That fact gave CTL an even more bargain-basement valuation, and it's why the firm has managed to perform in the face of weakening market internals in 2014. To be clear, CTL doesn't own the most outstanding network in the country, but it does own the cheapest one at a time when discount valuations are few and far between in this market.
The last year has been a good time to be an owner of Phillips 66 (PSX); shares of the $45 billion midstream energy stock have climbed more than 27% since last April. And while the firm's approximately 2% dividend yield is shy of what other midstream companies are paying out, PSX makes up the difference with its complete shareholder yield picture: last year, that payout tipped the scales at 7.69%.
Phillips 66 got its start when ConocoPhillips (COP) split off its downstream assets in an effort to concentrate its juicy exploration and production margins. Even though PSX is thought to be the "boring" side of the business, the firm's performance has been anything but. Phillips 66 is a refiner and gas station chain, and it also owns a lucrative chemical business and more than 62,000 miles of pipeline. The firm has been de-emphasizing its super-low margin refining operations, a strategy that should help to convert a bigger piece of every dollar it generates into profits.
At the moment, PSX looks cheap right now. The firm trades for just 13 times earnings, and it sports a balance sheet with a $10 billion net cash and investment position. That's a bargain stock. Combined with its hefty shareholder yield, PSX could be an important gain-generator for investors in 2014.
Satellite TV carrier DirecTV (DTV) is another shareholder yield standout to watch in 2014. The firm is the biggest satellite TV name in the U.S., with 20 million customers from coast to coast. It's also a huge player in Latin America, through ownership stakes in Sky Brazil, Sky Mexico and PanAmericana that tack another 17 million names onto its customer lists.
DirecTV's U.S. business is a cash cow. In general, the firm's U.S. subscribers are more apt to buy bigger packages, paying around 18% more than the average cable customer. Likewise, the firm's satellite network is instantly scalable to any household in the country without the huge installation costs of similarly high-end options like fiber optic to the home. With Latin America's huge growth rates and the big bucks streaming in from U.S. subscribers, DTV's business provides a very attractive one-two punch.
As the internet becomes more important to households than TV service (or rather, as it becomes a replacement for the latter), DTV's lack of a physical infrastructure could become a detractor for the U.S. market. Luckily, the firm's huge scale gives it the ability to pen important deals with content providers like the NFL, a move that should keep buyers renewing. More important, those risks are already priced into shares today.
That means investors are getting a lot of bang for their buck right now; in the last year, DirecTV has paid out a 7.28% shareholder yield.
Last up is home improvement retailer Lowe's (LOW). Lowe's has been another strong performer in the last year, racking up gains of more than 26% since last April. But add the firm's 6.4% shareholder yield to that number, and the shadow outperformance becomes even more impressive.
Lowe's has some big tailwinds pushing at its back. As the world's second-biggest home improvement retail store chain, Lowe's operates more than 1,800 stores across all of North America. While top rival Home Depot (HD) is larger, many investors have already forgotten just how much better positioned LOW was heading into the real estate crash of 2008. Now, with increasing home prices and consumer spending upticking, LOW is well positioned for the extended recovery as well.
Efforts to court commercial contracting customers and installation sales will directly benefit from increase home improvement spending in 2014, particularly as do-it-yourselfers look for help with larger projects than they can handle alone. LOW's biggest contributors to its hefty shareholder yield payout came from stock buybacks and dividend payouts last year; as long as interest rates remain at record levels, expect those two sources to get the majority of LOW's free cash. Investors should continue to benefit in a big way from that spending in 2014.
To see these names in action, check out the Shareholder Yield Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.