• For WTDI, the net buyback ratio was approximately 2.3% in 2014, and the combined dividend yield and net buyback ratio was over 5.1% for each of the last four years.
• If you consider the combined dividend yield plus net buybacks ratio, it is actually higher than the average dividend yield since 1871.2 This, we think, is very supportive of current valuations.
• Companies whose buybacks reduced shares outstanding had a weighted average reduction in shares outstanding of between 4.5% and 5% in each of the last four years, and only 3%‒14% of all buybacks conducted in these years resulted in share counts creeping higher. When comparing the gross buybacks (total amount) to the net amount that resulted in share counts declining, we find that share buybacks have been very effective in the last four years.
Share buybacks that reduce share count lock in per-share dividend growth. Firms can distribute the same dollar value of aggregate dividends in the future, but, since it is spread out over fewer shares, they mathematically increase their per-share dividends. If recent buyback trends continue—and we expect they will—this suggests that dividend growth is apt to be higher than its long-term historical norms.
1The price change for WTDI was only 29.3%. We used the Russell 3000, which had a larger increase, to illustrate price changes as a better way to capture companies that initiated a dividend and added to the U.S. equity market Dividend Stream but not necessarily to the price of WTDI.
2Source: Robert Shiller, as of 12/31/14.
Important Risks Related to this Article
Dividends are not guaranteed, and a company’s future ability to pay dividends may be limited. A company currently paying dividends may cease paying dividends at any time.