I'm talking about nearly double the average 10% annualized gains that you'd get by buying and holding the S&P 500 or the Dow Jones Industrial Average over the long-run. To figure out which names you should own, it boils down to three simple metrics that measure the cash a company is giving back to its investors each year.
What is the secret sauce I'm talking about? It's shareholder yield.
In a nutshell, shareholder yield is made up of anything that directly returns cash or equity to your portfolio. Yes, that includes obvious moves such as dividends -- but it also includes share buybacks and paying down debt.
Any of those three corporate actions can unlock significant value for shareholders, and the data back 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.
Topping the list of shareholder yield stocks is data storage firm NetApp (NTAP). While NetApp's 1.8% dividend yield is no slouch compared with most of its peers, it only scratches the surface of the pile of cash that NTAP has returned to its investors this past year. Between dividends and buybacks, NetApp has delivered a 15.9% shareholder yield over the last 12 months.
NetApp is a pure-play computer storage stock. The firm makes the hardware and software that enterprise customers use to expand their storage capacity. Because NetApp's network-attached storage devices can be purchased ad-hoc (rather than as part as a major datacenter overhaul), it's an ideal vendor for firms whose storage needs are gradually increasing (and those who don't want to shell out massive capital for all-new IT infrastructure). Despite rising competition in the storage business, NTAP's big installed base and IP portfolio should provide a defensible moat for the firm in the years ahead.
From a financial standpoint, NetApp is in stellar shape. The firm currently carries more than $4 billion in net cash, enough to pay for roughly 34% of the firm's current market capitalization. Subtract out that huge cash position, and NTAP's current P/E drops to just 13 times trailing earnings. That's a 25% discount to the rest of the firm's peer group right now.
NetApp isn't just cheap here, it's also shelling out returning cash to shareholders by the fistful. For investors in search of a new tech name, NTAP deserves a second look. For more on the stock, read about TheStreet Ratings' rating on the stock.
Big box retailer Target (TGT) is another major shareholder yield payer that investors should have on their radar. Target may have taken some knocks in the past year thanks to a handful of dumb missteps (such as the data breach that led to the ouster of the firm's then CEO), but that doesn't change the fact that Target is executing well in 2014. In the past 12 months, Target has given its shareholders a 12.28% shareholder yield.
Target doesn't need much of an introduction. The $37 billion firm is one of the biggest retail names in North America, with approximately 1,800 stores spread across the continent. Despite a saturated big box retail space, Target has been able to carve out its own niche, becoming one of the first chains to team up with exclusive designers and market form over cost in a big box setting. More recently, it's copied competitors, turning to the addition of grocery offerings as a tool to drive foot traffic in its doors.
While the addition of grocery has been diluting margins for TGT, that was a known evil of that strategy from the get-go. Overall, absolute profits have been on the rise, and that's exactly what Target's PFresh initiative was designed to accomplish. Meanwhile, the negative sentiment still in shares of TGT from last year's data breach makes this stock look like a bargain relative to its peers.
Bed Bath & Beyond
Bed Bath & Beyond (BBBY) is another big retail name that's making our shareholder yield list. BBBY operates more than 1,475 BBB stores spread across the U.S. and Canada, as well as a couple of hundred stores under the Christmas Tree Shops, Cost Plus, Harmon Face Values and Buy Buy Baby locations. BBBY remains one of the best-run names in specialty retail. The only problem is that this $11.7 billion household goods stock isn't priced like it.
Bed Bath & Beyond's product mix gives it exposure to household staples (such as linens and cookware) as well as more discretionary spending (such as kegerators), a combination that gives BBBY some downside protection when times get tough as well as upside potential when consumers get spend-happy. Consumers have been the latter for the last five years, and BBBY's revenue and profit have stair-stepped higher as a result.
One impressive attribute for Bed Bath & Beyond is the fact that the firm has grown its store footprint substantially without taking on any debt. Instead, it's mainly financed that expansion through cash from operations. And it's paid back shareholders along the way -- in the last year, BBBY dished out an 11.08% shareholder yield, returning $1.28 billion in net buybacks to shareholders last year.
BBBY is dirt cheap compared with the lofty price tags it's sported in the last few years. Now it looks overdue for upside.
It's been a stellar year for shareholders of Hewlett-Packard (HPQ). Since last summer, shares of the $64 billion tech stock have rallied more than 38%. And that's all on top of the 11.02% shareholder yield that HPQ management has paid out to shareholders in the form of dividends, buybacks and debt extinguishment. That top-notch shareholder yield payout means that H-P is positioned for additional upside for the rest of 2014.
Hewlett-Packard may be best-known to consumers for its huge PC business, building computers accounts for around half of HP's yearly revenue. But competition is eroding the profits in PCs, and the firm has been working hard to shift its exposure away from building commodities and more toward services, enterprise hardware and software instead. The plan is working, albeit slowly; since 2004, profit margins at Hewlett-Packard have been slowly working their way back up.
That doesn't mean that this tech giant has executed perfectly along the way. The firm's $11 billion Autonomy acquisition in 2011 can only be described as a disaster that destroyed significant shareholder value, but management is less likely than other big cash-saturated tech names to make the same mistake again. And the discount on shares (based on P/E, H-P is 30% cheaper than its peers) more than makes up for it.
Momentum is clearly on Hewlett-Packard investors' side this summer. For more on the stock, read TheStreet Ratings' take here.
United Parcel Service
With a 2.6% dividend yield, investors in United Parcel Service (UPS) could be forgiven for fixating on the firm's 67-cent quarterly payout. But anyone who ignores the complete shareholder yield picture in UPS is missing out on the bigger story: In the last 12 months, UPS has paid out a hefty 7.24% shareholder yield between that dividend, buybacks and a debt extinguishment.
That's a total of $6.84 billion returned to shareholders over the past year.
UPS is the largest package delivery company, with a fleet of 500 aircraft and 100,000 vehicles that deliver a combined 16.2 million shipments per day to homes and businesses around the world. The barriers to entry don't get much higher than package delivery. With UPS and main rival FedEx (FDX) saturating the market, the costs of replicating their networks mean that new competition is rare, and typically futile.
Besides package delivery, UPS is a major player in freight forwarding and logistics services, a business that's becoming more and more important (and profitable) as fuel costs rise for UPS' customers. UPS has started outperforming the S&P 500 within the last three months, a good indication that this stock is gaining favor with buyers in 2014. Look for that relative strength to carry over into the second half of the year in this shareholder yield champ.
To see these names in action, check out the Shareholder Yield Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.