Investors typically enjoy shareholder rewards, such as dividends and buybacks, but both have a way of sparking debate. That is particularly true of share repurchase programs, many of which are initiated when a company’s stock has already rallied.
Some exchange traded funds focus solely on dividends while others emphasize buybacks. There are also broader shareholder yield strategies, including the WisdomTree U.S. Quality Shareholder Yield Fund (NYSEArca: QSY). QSY identifies companies with a high total shareholder yield and favorable quality attributes.
The three components of shareholder yield are good measures for shareholder friendliness. The trifecta helps investors target companies with a history of dividend growth, low debt and the ability to support equity prices through share buybacks.
“In fact, we have found that shareholder yield, the ratio of the sum of dividends and buybacks to market capitalization, has been among the best measures of relative value over the past 10 years—a period during which many have claimed value investing is dead!,” said WisdomTree in a recent note.
QSY was formerly a large-cap value fund known as the WisdomTree U.S. LargeCap Value Fund.
Better Than Value Alone
Traditional value funds, many of which have been laggards for substantial portions of the recent U.S. bull market, often focus on price-to-earnings and price-to-book ratios, but shareholder yield can be a more potent valuation metric.
“We believe shareholder yield is a more effective measure of value than price-to-earnings or price-to-book. The least expensive quintile of stocks based on these metrics has underperformed the most expensive quintile in the last 10 years, while their outperformance versus the S&P 500 Index benchmark has lagged behind shareholder yield as a value factor,” according to WisdomTree.
Related: A Factor to Embrace in 2019
While QSY can be an alternative to traditional value funds, the ETF has a growth feel as the consumer discretionary and technology sectors combine for over 40% of its weight. The financial services and industrial sectors combine for over 35%.
Another knock on buybacks is that companies that deploy capital in that fashion may not be reinvesting enough in their businesses, but that argument is not universally true.
“Well-run companies may allocate a percentage of their excess capital across internal investments, share repurchases, dividends, debt reduction, M&A and other opportunities, based on their strategic priorities and expected rates of return,” said WisdomTree. “Managements typically want to deploy capital first toward the priority with the highest return on investment.”
For more information on the smart beta strategy, visit our Smart Beta Channel.