In the U.S., publicly traded companies routinely reward shareholders with cash payouts. There are two types of common payout vehicles: cash dividend per share and share repurchases. Dividend-focused research has been quite popular across the financial industry for a long time, but a lack of reliable data has led quantitative researchers to ignore the impact of buyback programs on stock returns. This is particularly notable given that buybacks represent a greater share of payouts than dividends.
Visible Alpha’s data science team analyzed a novel dataset* that captures both the buyback and dividends expectations, resulting in the first analysis of forward-looking total payout expectations.
Three Key Findings:
- Buybacks today form a larger part of aggregate payouts, and they are more volatile in time and highly dispersed across firms. For example, just the top 10 biggest buyback programs accounted for at least 40% of all cash spent on buybacks in 2021.
- Aggregate payout yield expectations have significant explanatory power over the next 12-month broad market returns.
- Earnings and payouts tend to be highly correlated – the higher the expected earnings of a firm in the next 12 months, the larger the expected total payout.
We make a contrarian observation for portfolio selection: In the sample period of 2016 to April 2022, the companies expected to return capital to investors through share repurchases and dividends underperform those companies who continue to reinvest their earnings instead.
To read the full analysis and see how we systematically construct and backtest our growth portfolio, download the full white paper by completing the form.