IB Net Payout Yields Model

Epoch Free Cash Flow

Interesting article from SmartMoney regarding Epoch Investment Partners and their focus on what companies do with free cash flow as being essential to superior risk adjusted returns. Not exactly familiar with Epoch, but their theory goes right along with our Net Payout Yield Portfolio.

Epoch Investment Partners is a specialized money management firm that oversees some $12B in assets (just slightly more then Stone Fox....lol). According to the article they've easily beaten the market because they focus on companies with strong cash flows that distribute the money to shareholders via buybacks, dividends, or paying back debt. They'll also consider companies that make acquisitions or expand internal capital projects as long as the deal exceeds the cost of capital.

Our Net Payout Yield Portfolio focuses on companies with strong buybacks and/or dividends. The debt position of a company is a 3rd consideration but not as big of a focus. Though, any company that issues debt to buyback stock is off our list. This portfolio is beating the market for a 4th consecutive year so it clearly works to focus on this concept.

All in all they have a similar approach to ours in that companies that have free cash flow will prosper. Focusing on just the net payout yield (dividends + buybacks) is more of a focus on the companies managements confidence in the future compared to the markets. In theory, the level of the yield signifies that the market is too pessimistic or overly optimistic. Naturally it's similar to the Dogs of the Dow theory, but it incorporates buybacks as well. Also, we think looking at the SP500 universe is much more attractive then just the Dow.

Epoch clearly has a great method for beating the market. Earnings and cash are always king. Interesting read about common sense investing. Companies that make money and return it to shareholders will typically provide market beating returns. This type of investing doesn't grab the headlines, but at the end of the day you'll have more money then the market.

  • Their methodology involves identifying companies that intelligently allocate free cash flow. Among the ten strategies they've crafted, five have track records of at least five years, and each of these has surpassed their relevant benchmarks as of Dec. 31. Epoch's largest strategy by assets, Epoch U.S. Value, with $3.1 billion, has a five-year annual return of 3.2% (net of fees), versus the Standard & Poor's 500's 0.4%.


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