Author Details

Mehdi Alighanbari

Mehdi Alighanbari
Executive Director, MSCI Research

Arihant Jain

Arihant Jain
Associate, MSCI Research

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How a Shift Toward Buybacks Affected Yield Strategies

  • Since the relaxation of regulations around share buybacks in the U.S., more companies have been redistributing cash to their investors through share buybacks in the U.S. and globally.
  • To have a correct and complete view of how much a company is returning to its investors, it is important to consider both dividend and buyback yields.
  • Using both the U.S. and global universe, we show that a hypothetical portfolio that invests in stocks with high total shareholder yield provided a consistent positive active return without significant sector biases.

While companies have used dividends as a way to distribute profits to shareholders since the 16th century, dividends are not the only way to do so. Share buybacks, where a company buys back its own shares in the market, have gained popularity over the last couple of decades — especially following the relaxation of regulatory limits in the U.S. In previous research, Taking Stock: Share Buybacks and Shareholder Value, we showed that total buybacks exceeded total dividend payments for MSCI USA Index constituents every year since 1997. Similar trends were visible globally, though the total amount in USD terms was greater in the U.S.

For investors who use yield strategies for income generation and even as an alternative to a fixed-income investment, a steady stream of dividend payments is important. With the shift toward buybacks as a way to redistribute profits, however, these investors may consider a more holistic view of income.

 

Buyback Yield Exceeded Dividend Yield in Most Years

The exhibit below shows the average dividend and buyback yield from January 1995 to December 2020. While buyback yield was higher in most years, it dipped below dividend yield in years of market difficulty, as companies have historically tried to avoid cutting dividends during such periods so as not to send a negative signal to the market.

 

Historical Aggregate Dividend and Buyback Yield for the MSCI USA Universe

This plot shows market-cap-weighted dividend and buyback yields for the constituents of the MSCI USA Index, for which the relevant data was available (the coverage was lower in the earlier part of the period). Source: Refinitiv (based on figures from corporate financial statements).

 

What Might This Mean for Yield Strategies?

Investors seeking yield may be able to “convert” buybacks into dividend-like cash by liquidating shares proportional to the buyback. There are pros and cons to this. Such investors may benefit from buybacks as they provide choice. Investors can participate and be taxed at the capital-gains rate, which is often lower than the tax rate on dividends, or choose not to participate and defer their capital-gains taxes. On the other hand, buybacks provide companies more flexibility in terms of timing and amount compared to dividend payments — which translates to greater uncertainty for investors.

That said, many who have adopted high-dividend-yield strategies have done so with the view that companies with sustainable and growing dividend payments have outperformed the broad market in the long run. For these investors incorporating buybacks into their selection criteria could be more natural, as the total shareholder yield (dividends + buybacks) may offer a more complete way to assess the level at which a company has returned cash to shareholders.

 

Dividends vs. Share Buybacks

Here we compare the behavior of three hypothetical portfolios, using three MSCI indexes as proxies for selecting stocks based on:

The exhibit below shows dividend, buyback and total shareholder yield for these three hypothetical portfolios and the broad-market-cap MSCI World Index, from May 31, 2005, to July 30, 2021.1 Over this period, the dividend-yield portfolio exhibited the highest dividend yield (as expected) and a slightly negative buyback yield2 (which means the constituent stocks issued more shares than they bought back, on average). As a result, the total shareholder yield for this portfolio was small relative to the other two.

The buyback-yield portfolio showed the highest buyback yield with dividend yield in line with the MSCI World Index. The total-yield portfolio had a high total shareholder yield with even contributions from dividend and buyback yield.

 

Dividend, Buyback and Total Shareholder Yield Across Three Hypothetical Portfolios

 

 

Toggle the dynamic exhibit above to see the results for the U.S.

From a full-period performance standpoint, the total-yield portfolio fell between the dividend-yield and buyback-yield portfolios, as shown in the exhibit below. This was expected, as the total-yield portfolio incorporates both yields in its design. What is noteworthy, however, is that the buyback-yield and total-yield portfolios outperformed the dividend-yield portfolios for most years in the period, though for many years the difference in performance was small.

 

Hypothetical Dividend-, Buyback- and Total-Yield Portfolios’ Performance Relative to Market-Cap Index

 

 

Toggle the dynamic exhibit above to see the results for the U.S.

 

Accounting for Sector Biases

While companies across all Global Industry Classification Standard (GICS®)3 sectors have used buybacks and cash dividends, certain sectors have favored one over the other. Information technology companies, for example, have had a tilt toward buybacks while others, such as utilities, have leaned toward dividends.

The exhibit below shows the active sector weight of the three hypothetical portfolios averaged over the period of analysis. Sectors such as information technology and consumer discretionary that had a bigger tilt toward buybacks were underweighted in the dividend-yield portfolio and overweighted in the buyback-yield portfolio. On the other hand, dividend yield was overweight the greater-dividend-paying sectors such as utilities, while the buyback-yield portfolio was underweighted to these sectors. The total-yield portfolio had more balanced exposures.

 

Active Sector Exposures of Hypothetical Dividend-, Buyback- and Total-Yield Portfolios

 

Toggle the dynamic exhibit above to see the results for the U.S.

 

Sector composition played a role in performance. Using return-attribution analysis, we saw that industries4 accounted for -24 basis points (bps) of performance annually for the dividend-yield portfolio, while contributing +74 bps annually to the buyback-yield portfolio. For the total-yield portfolio, this number was +28 bps.

 

A Broader View

With more companies choosing to redistribute profits through share buybacks as an alternative to dividends, looking at dividend yield may have become an incomplete way to assess stocks. The shift toward buybacks has not been uniform across sectors, however, and, as a result, investors that only focus on dividend yield or on buyback yield may have significant sector biases. We showed that a hypothetical portfolio that considered both buybacks and dividends to focus on total shareholder yield mitigated large sectoral biases and presented historical outperformance during our study period.

 

1The starting point is chosen based on the availability of data for all the indexes used in this analysis.

2Buyback yield is calculated as the change in trailing 12-month number of common shares outstanding/current number of common shares outstanding.

3GICS is the global industry classification standard jointly developed by MSCI and S&P Global Market Intelligence.

4In our analysis, we used the MSCI Global Equity Model for Long-Term Investors (GEMLT), which includes industries rather than sectors.

 

 

Further Reading

Harvesting Equity Yield: Understanding Factor Investing

Taking Stock: Share Buybacks and Shareholder Value

Looking Anew at Buybacks and Other Capital Allocations

Regulation