Investment Report - August 2011: Net Payout Yields
July was a negative month for the Net Payout Yields model on a relative basis. The model underperformed the S&P 500 by 0.36%, with a loss of 2.5% versus the 2.15% loss for the benchmark (Covestor calculations).
On a three month basis, the model has outperformed nicely during a very weak period in the market. It outperformed the S&P 500 by 1.45%, with a loss of 3.78% versus the 5.23% loss for the benchmark (Covestor calculations).
Trades
The model sold Boeing (BA) and bought Travelers (TRV) and Campbell Soup (CPB). As always, the moves are triggered by the decreases or increases in the Net Payout Yield of each stock with a bias towards limiting trades so stocks are not immediately removed or added based on a top 20 yielding list.
BA has a decent 2.7% dividend yield, but recently has eliminated buybacks. With normal yields in the model consistently adding up to greater than 10%, BA no longer fits into the requirements.
TRV has a solid 3.2% dividend yield. It has a trailing 12 month buyback yield of 13.6%. The buyback yield recently dropped in Q2 due to insurance losses from the tornado catastrophes in the spring. Prior to the drop in buybacks the NPY had hit 20%. With expectations that buybacks will resume at previous levels, TRV became an attractive addition to this model.
CPB has a very attractive 3.8% dividend yield. It also has a buyback yield of over 7% providing a total NPY over 10%.
Markets
While the market has been very weak over the trailing 3 month period and during the start of August, the NPY model benefits from such weakness. Not only do investors get paid to wait with the typically high paying dividend stocks in the model, but as can be seen from the new purchases of TRV and CPB the companies are able to take advantage of stock price weakness to repurchase shares at cheaper levels. Dividend only paying companies aren't able to allocate capital to take advantage of markets.
Reuters reports have suggested that corporations sped up stock buybacks during the recent market turmoil. While Reuters spins buybacks as mostly negative, historical studies do in fact show that companies with the highest Net Payout Yields do outperform the S&P 500. The keys with buybacks is that investors must focus on actual net of repurchases and issuances of stock noting that companies can issue more than they buyback which is clearly very negative. Also announced buyback plans might not materialize so reviewing actual purchases via quarterly reports is crucial.
Model holding Hartford Financial (HIG) recently announced a $500M buyback to take advantage of shares trading at half of book value.
Conclusion
Markets are likely to remain volatile with the sovereign debt issues in the developed economies. This model provides the opportunity for investors to remain invested with the peace of mind to sleep at night. While the model can and will drop at a rate hopefully lower than the market, investors should understand and be comforted that these large cap companies with strong balance sheets will take advantage of the market weakness and even economic weakness to prosper and increase value. Ultimately, it allows investors to avoid horrible market timing issues that causes the normal investor to sell low on panics and buy higher after the fear subsides.
Cash remains king. Buying companies that generate a lot of cash is even better.
Stats for model as reported via Covestor.com:
Disclosure: Long CPB, HIG, TRV in client and personal accounts. Please review the disclaimer page for more details.
On a three month basis, the model has outperformed nicely during a very weak period in the market. It outperformed the S&P 500 by 1.45%, with a loss of 3.78% versus the 5.23% loss for the benchmark (Covestor calculations).
Trades
The model sold Boeing (BA) and bought Travelers (TRV) and Campbell Soup (CPB). As always, the moves are triggered by the decreases or increases in the Net Payout Yield of each stock with a bias towards limiting trades so stocks are not immediately removed or added based on a top 20 yielding list.
BA has a decent 2.7% dividend yield, but recently has eliminated buybacks. With normal yields in the model consistently adding up to greater than 10%, BA no longer fits into the requirements.
TRV has a solid 3.2% dividend yield. It has a trailing 12 month buyback yield of 13.6%. The buyback yield recently dropped in Q2 due to insurance losses from the tornado catastrophes in the spring. Prior to the drop in buybacks the NPY had hit 20%. With expectations that buybacks will resume at previous levels, TRV became an attractive addition to this model.
CPB has a very attractive 3.8% dividend yield. It also has a buyback yield of over 7% providing a total NPY over 10%.
Markets
While the market has been very weak over the trailing 3 month period and during the start of August, the NPY model benefits from such weakness. Not only do investors get paid to wait with the typically high paying dividend stocks in the model, but as can be seen from the new purchases of TRV and CPB the companies are able to take advantage of stock price weakness to repurchase shares at cheaper levels. Dividend only paying companies aren't able to allocate capital to take advantage of markets.
Reuters reports have suggested that corporations sped up stock buybacks during the recent market turmoil. While Reuters spins buybacks as mostly negative, historical studies do in fact show that companies with the highest Net Payout Yields do outperform the S&P 500. The keys with buybacks is that investors must focus on actual net of repurchases and issuances of stock noting that companies can issue more than they buyback which is clearly very negative. Also announced buyback plans might not materialize so reviewing actual purchases via quarterly reports is crucial.
Model holding Hartford Financial (HIG) recently announced a $500M buyback to take advantage of shares trading at half of book value.
Conclusion
Markets are likely to remain volatile with the sovereign debt issues in the developed economies. This model provides the opportunity for investors to remain invested with the peace of mind to sleep at night. While the model can and will drop at a rate hopefully lower than the market, investors should understand and be comforted that these large cap companies with strong balance sheets will take advantage of the market weakness and even economic weakness to prosper and increase value. Ultimately, it allows investors to avoid horrible market timing issues that causes the normal investor to sell low on panics and buy higher after the fear subsides.
Cash remains king. Buying companies that generate a lot of cash is even better.
Stats for model as reported via Covestor.com:
| Inception Nov 02, 2010 | Manager* | S&P 500 | Avg Sub |
|---|---|---|---|
| Month to date (%) | -7.98 | -8.78 | -7.34 |
| 1 month (%) | -2.50 | -2.15 | - |
| 3 month (%) | -3.78 | -5.23 | - |
| Annualized since inception (%) | -0.17 | -1.58 | n/a |
| Since inception (%) | -0.14 | -1.24 | n/a |
| Sharpe (annualized) | -0.02 | -0.09 | n/a |
Disclosure: Long CPB, HIG, TRV in client and personal accounts. Please review the disclaimer page for more details.
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