Bullish Stock Buyback Story

Our Net Payout Yield Portfolio has always maintained that stock buybacks play a bullish story and lead to outsized returns. That portfolio has beaten the SP500 by nearly 5% per year since starting in 2007. Too many investors focus squarely on dividends which are double taxed and provide very little flexibility for the corporation. Its increasingly common for a company to pay a 4% dividend and buyback 2% of stock. The combined yield would be 6%. Isn't that better then just a 4% dividend alone or even a 5% dividend? If you need the cash, why pay take some profits on the larger gains.

Mark Hulbert reported that buybacks are starting to tell a bullish story for the market. Unlike in 2008 when corporations dramatically reigned in buybacks in order to conserve cash, this time they are starting to announce some serious increases over last year.

Corporations are flush with cash just like in 2009 but now they are choosing to move forward with repurchases. Most investors say they would rather have the cash via a dividend, but in the Hulbert rankings the Buyback Letter has the #3 ranking over the last 13 years. The biggest complaint is that corporations are bad timers which is partially true. They bought at high levels in 2007 and cutback in 2009 at the lows. As an individual or even a pension fund, would that money have been saved or used to buy more stock? By guess is that if you owned the stock then likely the later making this point mute. Whats not is that companies that repurchase stock and pay dividends at the highest combined yield tend to outperform the market.

Some stats from Hulbert:

• If corporate financial officers did think another credit crunch like 2008's were imminent, they would be hoarding their cash. After all, if a liquidity crisis that severe were to take place, most corporations would lose access to outside funding. Those without sufficient cash would not survive.

• In fact, the pace of share-buyback program announcements has been even faster than what I extrapolated in mid February. For the year to date through June 10, according to Thomson-Reuters, a total of $122 billion in repurchases has been announced -- equivalent to a full-year total of $276 billion. That would be nearly triple 2009's total.

• Consider the performance of the Buyback Letter, edited by David Fried, an advisory service that recommends stocks based on buyback activity. Since the beginning of 1997, which is when the Hulbert Financial Digest began tracking this service, it has produced a 10.7% annualized gain, compared to 5.1% for the overall stock market (as measured by the Wilshire 5000 index). Among all the services the Hulbert Financial Digest has tracked since 1997, the Buyback Letter is in third place (second when ranked on a risk-adjusted basis).