We all look forward to hitting financial milestones. I was pleased to see my portfolio reach one of them last Wednesday morning when value stocks went on a tear. Life was looking good.
But that was before the United States suffered from a brush with bumbling despotism a few hours later. My gains were lost, and nerves frayed, by the end of the day.
Normality, or what passes for it these days, resumed on Thursday as the U.S. started to restore itself and value stocks resumed their upward journey.
Those who’d like to join value’s recovery might start with firms that buy back their own shares.
The economic turmoil of the past year caused many companies to pause their share repurchase programs to conserve cash. But those with the ability, and guts, to continue buying their shares in hard times deserve a second look from investors because such firms have generally fared well over the long term.
For instance, money manager James O’Shaughnessy looked at the situation for large stocks in the U.S. where the 10 per cent that reduced their share counts the most over the prior year went on to gain an average of 13 per cent annually based on data from Jan. 1, 1927, through Dec. 31, 2009. By way of comparison, the market of large stocks gained an average of 9.7 per cent annually over the same period. You can find all of the details, and more, in the fourth edition of his book What Works on Wall Street.
Mr. O’Shaughnessy’s firm also studied Canadian stocks using shareholder yield, which is a combination of dividend yield and the percentage reduction in shares over the past year. Those with the highest shareholder yields outperformed the market by an average of 3.9 percentage points annually from 1987 through 2013.
Firms that buy back large fractions of their shares at low levels, say, during a pandemic-related market crash, can be particularly attractive.
That’s why I fired up S&P Global Market Intelligence to look for members of the S&P/TSX Composite Index that cut their share counts by more than 3 per cent over both the past year and the past five years. You can examine the list of 10 stocks that pass the test in the accompanying table along with each stock’s 12-month trailing price-to-earnings ratio and 12-month forward P/E, which is based on analyst earnings expectations.
I’ve made money on such stocks in the past and currently own shares of money-manager CI Financial Corp. (CIX) along with others mentioned in the table.
Toronto-based CI Financial moved into share-repurchase mode in earnest in the summer of 2018 when it made the unusual move to redirect money away from paying dividends to buying back stock. The firm discontinued a monthly dividend of 11.75 cents a share ($1.41 annually) and initiated a quarterly dividend of 18 cents a share (72 cents annually.)
The extra money helped CI Financial slash its share count by 19.5 per cent from the second quarter of 2018 to the third quarter of 2020 and by 5.9 per cent over the past year. Despite the reduced dividend, it still offers a generous dividend yield of 4.6 per cent. Add that to the 5.9-per-cent share reduction to get a shareholder yield of about 10.5 per cent.
The stock also trades at just 6.7 times trailing 12-month earnings and 6.2 times forward 12-month earnings. It looks like an interesting deal to me, which is why I own some of its shares.
I hope 2021 provides more happy surprises for value investors and far fewer unhappy surprises for the world in general.
Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.
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