Wednesday, June 8, 2011

Investment Report - June 2011: Net Payout Yields

The Net Payout Yields Model had a positive month on a relative basis, but on an absolute basis the model lost money. The model was down 0.15% versus the 1.35% drop for the SP500. More verification of how this model can outperform in down markets. For 2011 as of the May 31st close, the model was up 7.53% versus 4.53% for the SP500.

The model spent the month of May switching out of low yielding stocks and moving into higher yielding stocks. As the model is designed, when the Net Payout Yield (combination of dividends and stock buybacks) declines its a sign that the stock might be fairly priced compared to earnings and cash flow or just the visibility of management is more negative about the future. Naturally as a stock goes up, the dividend yield will decline making a stock less attractive. Also, the companies are less likely to engage in stock buybacks when a stock rises in price. This makes the model less emotional and a sleep well at night concept. Also as a stock in the model declines, the stock has yield support and likelihood of higher buyback purchases.

Proctor & Gamble (PG) and Millicom Cellular International (MICC) were both sold during May. Both stocks had huge gains over the last couple of months lowering yields. In addition, in the case of MICC the company decided to only be listed in Sweden going forward making the stock a required sell.

Three stocks were bought for the model. Raytheon (RTN) had been hurt by the fears of budget cuts in the defense sector pushing up the yields into the top of the list. RTN currently pays a 3.5% dividend and has an equally impressive buyback program. Annaly Capital Management (NLY) is a REIT that has a dividend yield over 13%. Activision Blizzard (ATVI) is a developer and publisher of video games. The sector has struggled with the move away from consoles to online gaming where new competitors like Zynga have gained a lead. The company has a small dividend around 1.4%, but the company has a major stock buyback in place boosting the total yield to near 10%. With all three companies having yields around 10%, its a sign that the market is focusing too much on the negatives and ignoring the cash generation ability of these companies.

The model should expect some more rotation in June as numerous other companies in the retail, services, and industrial sectors have very attractive yields now.

As previously mentioned, while the market has been weak the last few months, the weakness actually benefits this model where stocks are able to buyback company stock at lower levels and dividend yields naturally rise. With a decent yield in the 2-3% level, the model gets paid to wait.


Disclosure: Long ATVI, NLY, and RTN. Please review the disclaimer page. 





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