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What are we looking for?

Companies in the S&P 500 working hard to increase shareholder yield.

The screen

This week, I focus on a concept called shareholder yield. This can be broken down into three components: (1) debt reduction, (2) share count reduction and (3) dividend yield.

The idea here is that we look for companies that are not only paying a sustainable yield (coupled with a reasonable dividend payout ratio), but are also reducing their outstanding share count and shrinking their debt load (to avoid companies that are financing yield by issuing new shares, or new debt, respectively). I've used Morningstar CPMS to rank the constituents of the S&P 500 index on the best combination of:

  • The change in outstanding shares from four quarters ago, to the latest reported share count (here a figure of 9 per cent means that the company has reduced its outstanding shares by 9 per cent over the past four quarters);
  • The change in reported long-term debt from four quarters ago, compared with the latest reported long-term debt (here a figure of 44 per cent means that the company has reduced its long-term debt by 44 per cent over the past four quarters);
  • Dividend yield.

To qualify, stocks must have a dividend payout ratio of less than 80 per cent to ensure that the company is not paying out too large of a portion of earnings in the form of dividends. Recall this is a measure of dividend sustainability. Only stocks in the S&P 500 index were considered.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers. CPMS data cover more than 95 per cent of the investable North American stock market. With more than 110 equity and credit analysts, Morningstar has one of the largest independent institutional equity research teams in the world.

What we found

I used Morningstar CPMS to back-test this strategy from April, 2004, to December, 2016. During this process, a maximum of 15 stocks were purchased with a maximum of three stocks an economic sector. Stocks would be sold if their rank (which is based on the three factors listed above) fell below the top 35 per cent of the S&P 500 universe, or if the stock's dividend payout ratio exceeded 100 per cent. Over this period, the strategy produced an annualized total return of 11.5 per cent while the S&P 500 total return index advanced 8 per cent. In calendar year 2016, the strategy produced a total return of 20.8 per cent, while the S&P 500 gained 12 per cent. The top 15 stocks that qualify for purchase today are listed in the accompanying table.

As always, investors are encouraged to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Select U.S. companies boosting shareholder yield

RankCompanyTicker Mkt Cap ($Mil U.S.) Reduction of Shrs Out over last 4 Qs (%)Reduction of L-T Debt over last 4 Qs (%)Div. Yield (%)Div. Payout Ratio (%)
1Ameriprise FinancialAMP-N 18,132.8 9.444.12.631.0
2HP Inc.HPQ-N 25,053.1 5.167.33.630.4
3Navient Corp.NAVI-N 5,098.1 16.3-8.53.833.2
4Darden Restaurants Inc.DRI-N 8,892.6 4.068.13.155.6
5Kohl's Corp.KSS-N 7,272.5 7.9-5.94.949.9
6LyondellbasellLYB-N 35,405.7 9.7-21.03.935.2
7Macy's Inc.M-N 9,261.8 2.85.05.046.1
8Invesco Ltd.IVZ-N 12,529.8 3.616.33.749.3
9Target Corp.TGT-N 40,121.9 8.9-11.13.444.9
10Pitney Bowes Inc.PBI-N 3,009.3 5.8-21.64.645.5
11Xerox Corp.XRX-N 7,126.9 -0.120.84.428.9
12Corning Inc.GLW-N 23,295.5 19.7-24.52.237.2
13Valero Energy Corp.VLO-N 30,115.8 6.2-16.03.648.9
14Boeing Co.BA-N 98,172.6 7.8-26.83.664.1
15Reynolds American Inc.RAI-N 79,573.3 0.225.13.376.5

Source: Morningstar Canada. Note: For companies like Navient, the  minus 8.5% in reduction of debt means that the company has in fact increased their debt over the last four quarters.