An Underrated Investing Combination
At the end of the day, it is about returning cash to shareholders. That is how you make money
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For last week’s Power Hour (links above) we had a segment on the best-performing share cannibals of the last decade. Cannibal in this case means a heavy repurchaser of stock.
The usual suspects made the list like AutoZone, Murphy USA, and O'Reilly. You also have Lowe’s, a sneaky share cannibal that has utilized its undervaluation vs. Home Depot.
I definitely enjoy owning share cannibals. As a shareholder, I don’t have to do anything but hold the stock and my ownership of the business grows each quarter! Incredible. It also indicates a business is generating excess cash flow that can be returned to shareholders (which is all that matters at the end of the day).
I like companies that repurchase stock AND pay a dividend even more. It is an underrated combination that can drive huge dividend per share growth over the long term. These are much easier stocks to own — all else equal — than sole dividend payers or repurchasers.
The problem with being a long-term shareholder in a stock that only repurchases shares and doesn’t pay a dividend is you never get any cash unless you sell. You (the shareholder) are forced to make a sell decision in order to actually realize gains. Investors are generally bad at selling stocks.
Paying a dividend in tandem with a buyback program allows a company to alleviate this pressure for long-term shareholders. It also makes it easier to steadily grow your dividend per share, which will make everyone happy.
Take American Express. It has reduced its shares outstanding by around 4% a year, which has helped drive an impressive 10%+ dividend per share growth over the last 10 years.
Even though dividends are not as tax friendly, I think there is plenty of upside both financially and psychologically for shareholders to pay a growing dividend along with the buyback.
I think AutoZone would run better if it used some money to pay a dividend while also repurchasing stock.
I think the tobacco companies would work better if they repurchased stock along with paying dividends.
Just some random thoughts. Listen to our full podcasts on Chit Chat Stocks for hour-long conversations on various investing topics such as these.
Thank you to all the subs and listeners!
- Brett
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Couldn't agree more. Aviva (AV) is the best example of such a company in my portfolio: it currently has a 7% dividend yield, bought back around 3% of the stock each of the last two years (with a policy to continue doing so on a regular basis), and is growing the cash cost of the dividend by mid to high single digits each year.
What makes it sweeter is that I bought the shares during the pandemic when they were forced by government mandate to suspend the dividend, and traded below £3 per share. The yield on my average cost basis is therefore nicely in the double digits.