These five stocks have consistent dividend and share repurchase programs that can significantly enhance your total return over the long term
I like to write about stocks and cryptos. One reason is that it helps me sort out my own stock portfolio. I figure it could help others as well.
I have found that one method of making fairly decent returns is to stick to dividend-paying stocks. That way at least you get a return for your money.
There is also a simple way to enhance your stock returns. It does not require much research:
Purchase dividend stocks of companies that also buy back their own shares.
The rationale is that by having fewer shares a company can raise its dividend payments on a per-share basis. It also reduces the share supply, helping push up the stock price. I have written numerous articles about this effect.
I have found five such stocks that you can consider for your own portfolio:
- Microsoft (NASDAQ: MSFT)
- Apple (NASDAQ: AAPL)
- AbbVie (NYSE: ABBV)
- Oracle (NYSE: ORCL)
- Micron Technology (NASDAQ: MU)
Let’s look at these stocks.
Believe it or not, Microsoft is one of the few tech companies that purchase large amounts of its shares along with paying a hefty dividend. For example, in the past quarter alone it bought back $7.18 billion of its own shares. In addition, it paid out $4.2 billion in dividends.
In fact, Microsoft just raised its dividend to $2.48 per share, for a 0.86% dividend yield. That was as of Oct. 5 when MSFT stock was at $290.
In addition, the company also recently raised its buyback program to $60 billion. About every three years it announces a new program. This implies a $20 billion purchase annually. That works out to 0.92% of its $2.17 trillion market cap.
So its buyback yield is 0.92% along with a 0.86% dividend yield. This results in a total yield of about 1.78%. In reality, the net yield to shareholders will be slightly lower since some of the buybacks purchase shares issued to employees through options, SARs, and restricted stock.
But the point is that MSFT stock does a great job of returning capital to shareholders through dividends and buybacks.
You may be wondering how buybacks help return capital to shareholders. I recently wrote an article in The Motley Fool which describes how this works: “How a Dividend-Buyback Combo Could Lead Microsoft Stock Higher.”
It shows that in the past 10 years the company has reduced its share count by over 10%. As a direct result, the dividend per share amount has increased 18% higher than the cost of the dividends paid for over the decade.
In other words, over the past 10 years dividends per share have risen 259% but the cost of those dividends only rose 218.9%. That means that the per-share rise was 18% higher (i.e., 259%/218.9%-1). This effect leverages and compounds out very quickly for 15 and 20 years.
The article shows this is the main reason (along with higher earnings per share amounts) companies buy back their stock.
Apple pays an annual 88 cents dividend. That works out to a dividend yield of 0.62% on its stock price of $141.68 per share as of Oct. 5. That may not seem like much, but the company also buybacks back large amounts of its shares. That is also a return of capital to remaining shareholders.
For example, in the last quarter alone, Apple repurchased $25.585 billion of its own stock. This was a lot more than the dividend cost of $3.767 billion.
But consider this. In the past 10 years, Apple has cut its share count from 26.02 billion down to 16.57 billion. This is even after issuing shares to employees. That is a reduction over love one-third (-36.3%). This helped push up the stock, increased everyone’s stake, increased dividends per share as well as earnings per share, and generally reduced the supply of shares for such a large company.
You can see this effect in the growth of dividends per share (DPS), vs. the cost of the dividends. DPS started in 2012 (10 years ago) at 10 cents and are were 82 cents in the last 12 months. That represents annualized compound growth of 23.4% each year.
But the cost of the dividends grew from $2.488 billion for the year ending Sept. 2012 to an estimate of $14.463 billion for the year ending Sept. 2021. That represents growth of 5.813 times over 10 years or 19.2% annually on a compounded basis.
So DPS is up 23.4% and the cost is up 19.2%, so investors gained a 21.9% increase (i.e., 23.4%/19.2%-1) in their dividends over the past 10 years.
This is solely due to the buybacks. It is similar to the 18% gain that Microsoft had.
This also shows you that the benefit of buybacks comes to long-term shareholders, not short-term traders.
AbbVie is a major drug company that owns Humira, a very popular Arthritis medication and in May 2020 it bought Allergan, which makes Botox. But AbbVie also pays a hefty dividend. Its $5.20 annual dividend per share works out to 4.75% of its $109.51 price as of Oct. 5.
In fact, this dividend is likely to increase with an announcement due out around Oct.30. The company tends to increase its dividend annually at that time.
But not too many people know that it also buys back large amounts of its shares.
For example, in the last 12 months to June 2021, AbbVie bought back $1.1 billion of its shares. That compares with $8.1 billion in dividend payments. Note that here the dividend payments outweigh the buyback payments.
As you might suspect, this means its share count has fallen at a slower speed. This is the opposite of Microsoft and Apple, where buybacks are much higher than dividends.
For example, AbbVie has been buying back shares in the last 9 years including the last 12 months (LTM)to June. As a result, the share count fell from 1.557 billion in 2013 to 1.479 billion in 2019. In May 2020 the company bought Allergan (Botox) and now it has 1.767 billion shares. So, the share count fell 5% during the 8 years ending 2019.
This shows another benefit of share buybacks. When a company wants to make a major acquisition it has the ability to do so without a dilution factor as great as if it had not been buying back shares. It’s likely to keep buying back shares with its higher cash flow from the acquisition, in order to reduce the dilution.
Oracle, the $245 market cap software company, pays a $1.20 dividend. That works out to a 1.38% annual yield on its $91.51 stock price as of Oct. 5.
In addition, just like Microsoft and Apple, its buyback purchases are multiples of the dividend cost. This has led to a huge decline in share count in the last 10 years.
For example, for the 10 years ending May 2021, share repurchases have increased from $5.856 billion to $21.6 billion. Dividend payments went from $1.21 billion to $3.06 billion. So you can clearly see that buybacks have dominated its use of free cash flow.
As a result, the share count has fallen dramatically. It declined from 4.9 billion in May 2012 to 2.743 billion in the most recent quarter. That represents a drop of over 44%. This is one of the largest share count declines I have seen.
So what did this do to the dividend per share (DPS)? It rose from 24 cents in the year ending May 2012 to $1.04 in May 2021. As I said, the DPS is now at $1.20. So that is a gain of 3.333 times over 10 years, and 4.0 times over 10.5 years. This works out to 15.7% annually on a compound basis over 10 years.
Compare this to the dividend cost. It rose from $1.21 billion to $3.06 billion or just 153% over 10 years, much slower than the 333% gain in the DPS. In other words, whereas the DPS rose 15.7% annually, the dividend cost rose just 9.7%. This can be seen in the figure below.
This implies a huge 61.8% gain in the DPS compared to its costs. And that is solely due to the huge buybacks at Oracle.
The same effect also happened with its earnings per share. This has therefore led to a higher stock price as well, given the same P/E ratio.
Micron Technology (MU)
On an annualized basis, this works out to 40 cents per share or a dividend yield of 0.57% per annum.
However, the company has also been buying back its stock. I wrote about this recently in my InvestorPlace article, “Micron’s New Dividend With Its Huge Buybacks Will Boost MU Stock.”
“In the past fiscal year, the Cash Flow Statement shows that it spent $1.294 billion in share buybacks.”
“This results in a buyback yield that enhances the dividend yield. For example, if we divide $1.294 billion by the market cap of MU stock ($79.5 billion), the buyback yield works out to 1.628%. So if we add the 0.566% dividend yield to the 1.615% buyback yield, the total yield is 2.194%.”
So you can see this is an opportunity to get in on the bottom floor of a company that will be buying its own stock and enhancing its DPS growth.
These five stocks have both dividend and buyback payments that will benefit their shareholders. I have tried to show how the buybacks benefit dividend per share growth.
But these benefits only really accrue to long-term shareholders of the stocks. That is the rub. It is a way for the company to reduce its dividend costs, keep its DPS growing, and also encourage its shareholders to hold on for the long term.
By the way, there is also a net ROI gain, after taxes, for shareholders of companies with buybacks. I have written several articles about this, including one very detailed one for subscribers to my Total Yield Value Guide (see below).
It boils down to the fact that the share price gain is greater for buyback companies (that also pay dividends) vs. those that payout 100% of their FCF in dividends. Maybe I will write an article about this some time to illustrate it.
These are not stock recommendations. You need to do your own work on your stock picks. I am not responsible for any gains or losses you make with my analysis of these stocks. Just use your own common sense. This is one way you can do that.
If you want to read all my Medium stories and have access to all of Medium’s articles, click on this link to join Medium and become a member. Full disclosure: shamelessly, as you might suspect, I refer you to Medium in order to share in your monthly or annual fee.