Speaker 1: Bloomberg Audio Studios, podcasts, radio news.
Speaker 2: Dividend investing has a long and storied history. A substantial
Speaker 2: percentage of market returns are due to the impact of
Speaker 2: reinvested dividends compounding over time. But it turns out dividends
Speaker 2: are only part of the picture driving stock returns. Shareholder yield,
Speaker 2: as it's become known, includes dividends, but also share buybacks
Speaker 2: and debt paydowns as indicators of future gains. I'm Barry Ritholtz,
Speaker 2: and on today's edition of At the Money, we're going
Speaker 2: to discuss how you can participate in shareholder yield and
Speaker 2: get more out of dividends. To help us unpack all
Speaker 2: of this and what it means for your portfolio, let's
Speaker 2: bring in MEB Faber, founder and CIO of Cambria. The
Speaker 2: firm manages numerous ETFs, including those that focus on shareholder yield,
Speaker 2: and is approaching three billion dollars in client assets. He
Speaker 2: is the author of Shareholder Yield, A Better Approach to
Speaker 2: Dividend Investing, just out in its second edition this week.
Speaker 2: So MAB, let's start with the basics. How do you
Speaker 2: define what shareholder yield is?
Speaker 3: Most common definition is total cash payout meaning cash dividends
Speaker 3: plus net stock buybacks. Net being a very key word
Speaker 3: there because it incorporates not just stock buybacks but also
Speaker 3: share issuance. So think about just dividends and buybacks. That's
Speaker 3: what most people think of when they think of shareholder yield.
Speaker 2: Huh. Interesting. Why should companies that are returning cash to
Speaker 2: investors through either dividends or buybacks be attractive to investors?
Speaker 3: There's a lot of coinherited traits for a company that's
Speaker 3: paying dividends or buying back shares. The biggest is they
Speaker 3: have to have the cash in the first place. So
Speaker 3: if you're paying out a ten percent yield, then likely
Speaker 3: you either have a ton of cash flow or more
Speaker 3: cash than you know what to do with. A good
Speaker 3: traditional case study would be Apple, who did both. They
Speaker 3: pay out patch dividend and they do a stock buyback,
Speaker 3: and the summation of the two is really the combination.
Speaker 3: Being agnostic the holistic that matters.
Speaker 2: So what does the research, and I know you spend
Speaker 2: a lot of time doing academic research, what does it
Speaker 2: suggest about higher yielding stocks versus stocks that have little
Speaker 2: to no yield.
Speaker 3: First of all, investors love dividends, there's probably no more
Speaker 3: time honored tradition than people getting that quarterly dividend check.
Speaker 3: Passive income people fantasize about sitting on the beach, drinking
Speaker 3: pina coladas and cabo and getting that dividend check. But
Speaker 3: you have to account for structural changes in markets, and
Speaker 3: really starting in the nineteen eighties and accelerating in the
Speaker 3: nineteen nineties, companies started buying back more stock than they
Speaker 3: start than they paid out in cash dividends, and any
Speaker 3: given year since then, there's been more buybacks. So investors
Speaker 3: that focus only on dividends historically now miss over half
Speaker 3: of the picture on how companies distribute their cash. This
Speaker 3: is also important because of the standpoint of companies that
Speaker 3: issue shares. So you think the companies in my home
Speaker 3: state of California, the tech companies that love to make
Speaker 3: it rain to executives and c suite with stock based compensation.
Speaker 3: So avoiding the companies that have a negative yield, meaning
Speaker 3: they're diluting investors every year is important too. And so
Speaker 3: if you do the combination of these two factors and
Speaker 3: look at it in history, it's really been the premier
Speaker 3: way to look at value investing for the past one
Speaker 3: hundred years really interesting.
Speaker 2: So if a company has some extra cash on hand,
Speaker 2: are they better off raising their dividends, doing a new buyback,
Speaker 2: or a combination of both.
Speaker 3: The answer is it depends. You know, the job of
Speaker 3: a CEO is really to maximize the return on investment.
Speaker 3: There's only five things a company can do with its cash.
Speaker 3: That's the menu. There's no secret in and out menu here, right.
Speaker 3: It's they can pay out a dividend, they can buy
Speaker 3: back stock, they can pay down debt if they have it,
Speaker 3: they can go merge or acquire another company. And then
Speaker 3: the last one, which is what everyone spends ninety nine
Speaker 3: percent of the time focusing on, is reinvest in the
Speaker 3: business R and D. So what new iPhone are we launching,
Speaker 3: what new chip is Nvidia doing? What new service are
Speaker 3: we offering? But really it's the job of the CEO
Speaker 3: to maximize those five levers. And in some cases, if
Speaker 3: you look at someone like Apple, you get to be
Speaker 3: so big and you have so much cash and money
Speaker 3: you simply can't spend it. Now, you probably could in
Speaker 3: a Brewster's million sort of way, but it wouldn't be
Speaker 3: beneficial to shareholders. You see a lot of company that
Speaker 3: do that, they spend the money, but in a way
Speaker 3: that doesn't maximize the ROI.
Speaker 2: So let's talk a little bit about shareholder yield across
Speaker 2: different market caps. Does it matter if you're a large
Speaker 2: cap or a medium or a small and how do
Speaker 2: you guys think about different sized companies and their shareholder yield.
Speaker 3: When we wrote this book a decade ago, you know,
Speaker 3: we looked at the historical returns of shareholder yield companies
Speaker 3: and it turned out that shareholder yield beat any dividend
Speaker 3: strategy we could come up with high dividend yield, dividend growth.
Speaker 3: It beat the market on and on, and we saw
Speaker 3: it as really the premiere factor. Now we didn't invent this.
Speaker 3: Jim O'Shaughnessy our but has talked a lot about this
Speaker 3: in his classic book William Priest and Others. But modeling it,
Speaker 3: we saw that it made the most sense of any
Speaker 3: strategy we could find. It worked in large cap, it
Speaker 3: worked in small cap, it worked in foreign and worked
Speaker 3: in emerging. If you have any investing factor or any strategy,
Speaker 3: you want it to work most of the place, most
Speaker 3: of the time. Right, So if it works in US
Speaker 3: but not in Japan, that's problem. If it works in
Speaker 3: small cap but not large cap, that's a problem. And
Speaker 3: the beauty of this strategy it's not only worked since
Speaker 3: the publication of the book, but it's worked as far
Speaker 3: back as you can take it, and it's very, very consistent.
Speaker 3: So it really captures a number of factors and characteristics,
Speaker 3: the main one of course being value and quality, which
Speaker 3: has been hard to keep up. You know, the romping,
Speaker 3: stomping SMP of the past fifteen years has creamed everything,
Speaker 3: but shareholder yield across categories right now in twenty twenty four,
Speaker 3: because of the valuation gap looks about the best it's
Speaker 3: ever looked over the past decade.
Speaker 2: So discussing cap size, you have a shareholder yield ETF
Speaker 2: for large cap, for mid, and then a combined small
Speaker 2: cap and microcap, and from what I've seen over the
Speaker 2: past few years, they've beaten the s and P. If
Speaker 2: you go back ten or twenty years, the SMP is
Speaker 2: still slight performing. But let's talk about geography. Those three large, mid,
Speaker 2: and small are all US based. You also have an
Speaker 2: international version and an emerging markets version. Tell us about
Speaker 2: overseas shareholder yield.
Speaker 3: So if you look at across all five of these funds,
Speaker 3: the average stock coming in has a double digit shareholder yield.
Speaker 3: And let that sink in for a second. SMP is
Speaker 3: yielding what one point three percent dividend yield right now,
Speaker 3: and so ignoring buyback yield is a huge mistake, particularly
Speaker 3: in the US. The US is very corporate buyback focus,
Speaker 3: so the majority of the shareholder yield in the US
Speaker 3: comes from the buyback yield. Again, we're talking about ten
Speaker 3: percent yields coming in. In foreign developed and emerging that
Speaker 3: tends to be closer to fifty to fifty dividends and buybacks,
Speaker 3: So you'll see a higher five six percent dividend yield
Speaker 3: in those geographies, largely because they have a culture of
Speaker 3: paying cash dividends more than buybacks, although that is changing.
Speaker 3: You're seeing in particular countries like Japan really start to
Speaker 3: ramp up their buy back focus. And to be clear,
Speaker 3: when you talk about buybacks, there's so much misinformation. Oh
Speaker 3: my goodness. The number one thing is if you frame
Speaker 3: buybacks simply as tax efficient dividends or flexible dividends, it
Speaker 3: changes your entire perspective across all of this, and nobody
Speaker 3: understood that understands this better than Warren Buffett. Warren Buffett
Speaker 3: has been talking about buybacks since the nineteen eighties. Right
Speaker 3: his famous quote on Bircher, he says, Bircher's never paid
Speaker 3: a dividend. It once paid a ten cent dividend in
Speaker 3: the sixties, and I must have been in the bathroom, right,
Speaker 3: So he gets it. He gets it on buybacks. On average,
Speaker 3: if a stock is cheap, a buyback is a great
Speaker 3: use of cash. You can buy a dollar for eighty
Speaker 3: cents for fifty cents, and then that's what you see
Speaker 3: in the portfolios across the shareholder yield lineup. The price
Speaker 3: earnings ratios, the cash flow ratios are at a significant
Speaker 3: discount to the S and P five Fronter, but also
Speaker 3: the categories these funds tend to be in. We're talking
Speaker 3: single digit PE ratios, which is a gap that has
Speaker 3: widened over the past decade, but in particularly the last
Speaker 3: three to four years with some of the largest valuation
Speaker 3: spreads we've seen. So it's a particularly attractive time, we think,
Speaker 3: to be in shareholder yield stocks.
Speaker 2: So who is the typical buyer of any of these
Speaker 2: shareholder yield dtfs? Are they traditional value and dividend investors,
Speaker 2: who do you see as purchasing your funds.
Speaker 3: It's a little bit of everything. You have advisors that
Speaker 3: think in the style boxes, so they're making substitutes like
Speaker 3: a lego. You have individual investors, you have institutions that
Speaker 3: are simply looking for a better approach to not just
Speaker 3: income but just equity investing in general. What's interesting is
Speaker 3: you have a lot of investors in this cycle that
Speaker 3: have shied away from foreign and emerging markets. How many
Speaker 3: times have you heard I don't trust the numbers, I
Speaker 3: don't believe in emerging markets what they're doing. And our
Speaker 3: emerging market fund is actually our second biggest fund. And
Speaker 3: what's interesting about emerging markets. If your company that paying
Speaker 3: out ten percent of your market cap and dividends or
Speaker 3: buying back shares, you know what you're not doing with
Speaker 3: that money is squandering it. You're not naming stadiums, you're
Speaker 3: not buying jets, you're not doing bribes, on and on.
Speaker 3: You have to have the cash to be able to
Speaker 3: pay it out. So by definition, this type of strategy
Speaker 3: is a quality strategy, so it avoids a lot of
Speaker 3: those types of companies. And one more comment, So traditionally
Speaker 3: in the US. This tends towards sectors like financials and energy,
Speaker 3: and that's true across all the geographies currently. And people say, mam,
Speaker 3: you're missing out. You're missing out on the tech AI
Speaker 3: boom in the US. You have a very low tech
Speaker 3: exposure in the US, and that's true. Part of that
Speaker 3: is the tech companies are expensive, and they also are
Speaker 3: doing a lot of share issuance and emerging markets tech
Speaker 3: is the largest sector.
Speaker 2: Wow.
Speaker 3: And so part of that is simply because emerging markets
Speaker 3: are down so much, but also they have a very
Speaker 3: high shareholder yield there as well. Huh.
Speaker 2: Really interesting. So to wrap up, investors who might traditionally
Speaker 2: have been straight divenend buyers should be considering shareholder yield dtfs.
Speaker 2: It gives them the full benefit of management that's trying
Speaker 2: to return the most amount of cash back to shareholders
Speaker 2: through both divin ends and the more tax efficient stock
Speaker 2: buybacks too. I'm Barry Retolts, and this is Bloomberg's at
Speaker 2: the Money