Seeking Companies That Share
It will come as no surprise to income investors that cash dividends are on the decline. Dividend payments had been trending upward for 17 years before they began to fall in the December 2008 quarter, and Standard & Poor’s estimates that the S&P 500 Index’s cash dividends per share will fall nearly 23% this year.
But that decline actually understates how parsimonious companies have become with shareholders. The climate for stock repurchases is even worse.
Looking for the generous? Shareholder yield considers the two most common ways companies share the wealth with their investors — dividends and stock buybacks.
For example: IBM ($121; IBM) paid out $2.8 billion in dividends and repurchased $5.1 billion in shares over the last 12 months. Divide the sum of dividends and buybacks by the stock-market value of $158.1 billion, and you get a shareholder yield of 4.9%.
Based on shareholder yield, companies are being mighty stingy. Among the 1,453 companies in the S&P 1500 Index with three years of history, total dividend payments were down 7.5% over the last 12 months from the same period a year earlier. But buybacks turned negative in the last 12 months, with the companies combining to issue $116.2 billion more shares than were repurchased. In the year-earlier period, those companies bought back a net $337.2 billion in shares.
The recent numbers reflect massive share issuances in the financial sector. About 52% of companies in the S&P 1500 bought back more stock than they issued in the last 12 months, down from 63% a year ago but still above levels seen two years ago.
Buybacks have grown in popularity relative to dividends for several reasons:
Flexibility: Once a company begins paying a dividend, it can be risky to cut back. Investors who purchase stocks expecting income tend to get upset when the flow dries up. Cutting back on repurchases generally attracts less attention and arouses less ill will.
Appearance: Many companies with excess cash fear that paying a dividend will jeopardize their reputations as “growth” stocks. That stigma has receded in recent years, with such stalwarts as Oracle ($22; ORCL) announcing its first payout in April. Cable-TV giant Comcast ($15; CMCSA) began paying a quarterly dividend in 2008 after a nine-year hiatus.
Per-share growth: Suppose a company with 100 million shares outstanding earns $100 million. That equates to $1.00 per share. If that company repurchases 10 million of its own shares, the same $100 million in earnings represents $1.11 per share.
Stock options: Management teams paid in stock options want a high stock price, which is not always the same as total return. Buybacks tend to lift share prices, while dividends do not.
Some companies responded to the credit crunch by reducing their dividend payments — as evidenced by the $20 billion decline in cash dividends for S&P 1500 companies with three years of history. But net share buybacks declined by more than $450 billion over the last year, as many companies slowed or stopped their repurchases to preserve cash. We expect stock repurchases to rise in coming quarters as the economic climate improves.
In the current environment, companies with high shareholder yield stand out from the crowd. The table below lists 22 Forecastsrecommended stocks with shareholder yields of at least 3%. None has cut its dividend over the last year. Three shareholder-yield selections are reviewed below.
Accenture ($37; ACN) repurchased $1.45 billion in shares in the last year, lowering the share count by 4%. In October, Accenture announced a $4 billion repurchase authorization and hiked the semiannual dividend 50%. We expect both aggressive share buybacks and dividend increases to continue in coming years, fueled by strong cash-flow growth.
In fiscal 2009 ended August, Accenture grew free cash flow 18%. Cash holdings jumped 26% to $4.55 billion, while long-term debt remained negligible. Total revenue fell 8% to $21.58 billion in fiscal 2009 on 11% lower consulting sales. The outsourcing segment also remains under pressure because of project delays and merger-related cancelations.
However, Accenture sees growth opportunities in public services, one of few bright spots in the latest quarter. Demand for systems integration and health and human-services work remains strong. And the private sector shows signs of thawing. In October, Accenture announced multiyear outsourcing contracts with QBE Insurance and a subsidiary of Italian auto manufacturer Fiat Group. Accenture is a Buy and a Long-Term Buy.
In the past 12 months, Exxon Mobil ($75; XOM) has returned $38.21 billion to investors through buybacks and dividends. Although weak energy prices have hurt profits and free cash flow has declined in each of the last four quarters, Exxon still holds $15.73 billion in cash — $3.57 per share. That cash gives Exxon the flexibility to keep the dividend rising and the share count falling.
While rivals curb production and sell off assets, the traditionally conservative Exxon has pledged to invest $29 billion in capital projects this year, up 11%. The oil giant’s latest initiative, a $4 billion agreement to purchase Kosmos Energy’s 23% stake in an oilfield off the coast of West Africa, has aroused the ire of the Ghana National Petroleum Company (GNPC). GNPC has talked with at least three companies including BP ($58; BP) about submitting a joint bid for the block. However, Exxon’s cash resources and reputation suggest it still has an excellent chance to gain an interest in the field, estimated to contain at least 1.2 billion barrels of oil. The deal would mark Exxon’s first venture in Ghana and significantly expand the company’s operations in Africa, which already account for about 21% of its crude reserves. The Ghanaian field is attractive in part because Africa is one of the cheapest places in the world to pump oil. With oil hitting a new 12-month high and nearing $80 per barrel, Long-Term Buy-rated Exxon seems capable of topping market expectations.
Stryker’s ($48; SYK) September-quarter results cheered Wall Street, driving the shares up 6%. Not that the operating environment has been friendly. Over the first nine months of 2009, Stryker’s sales fell 2%, limited by hospitals with tight budgets and patients postponing elective surgeries. But sales of orthopedic implants for more critical procedures have partially insulated Stryker. Spinal-implant sales rose 10% in the nine months ended September, while revenue from skull and face implants has advanced 5%. Stryker says capital spending appears to be bottoming out, suggesting it has seen the worst of the recession.
In the last 12 months, Stryker has repurchased $970 million in shares, reducing the share count by 4%. The annual dividend, typically paid out in January, has risen in each of the past 14 years. Management says it will continue to pour excess cash into stock buybacks and dividend growth, as well as acquisitions. Earning a Quadrix® Overall score of 90, Stryker is a Buy and a Long-Term Buy.