By Philip van Doorn, MarketWatch
Orbital ATK Inc.
Long-term stock performance is helped greatly when companies not only pay dividends but reduce the share count by repurchasing shares, say analysts at New York-based investment bank Jefferies. A lower share count means rising earnings per share for a profitable company.
With interest rates so low for so long, and billions of dollars in government bonds around the world with negative yields, dividend stocks have been on fire. This year’s best-performing sectors in the S&P 500 /zigman2/quotes/210599714/realtime SPX -0.91% are telecommunications, with a total return of 14.9%, and utilities, at 13%.
Making the case for dividends and buybacks
The world is awash with cash, as the Federal Reserve and other central banks have unleashed stimulus after stimulus since the credit crisis of 2008. Lower borrowing costs and a long economic expansion in the U.S. mean that domestic small- and mid-cap companies are in “great shape” as they’re holding a lot of cash, according to Steven DeSanctis, an equity strategist at Jefferies.
In a report Monday, DeSanctis said an increase in mergers has reduced the number of U.S. stocks to their lowest level since 1984.
“We have also seen over 31% of small-caps reduce shares outstanding over the last year, and since 2011, large-cap companies have lowered their shares outstanding,” he said.
Using his bank’s data, as well as information provided by FactSet and Russell Investment Group, DeSanctis and his research team calculated that, from the end of 1985, companies that reduced their share counts through buybacks while paying dividends outperformed the overall U.S. stock market significantly:
Companies that reduced share counts achieved an average annual total return of 14.1%, compared with 6.7% for companies that let share counts rise or stay at the same level.
Companies that paid dividends had an average annual return of 11.7%, versus 6% for non-payers.
Companies that had done both — reducing share counts while paying dividends — had an average annual return of 13%, against an average return of 9% for the broader market.
Buybacks may not always work out well if a company overpays for its shares or its board of directors chooses buybacks over long-term investment in growing its business.
Jefferies’ small- and mid-cap picks
Since “everyone wants dividends,” DeSanctis decided to list stocks of companies that his bank rated “buy” that have been paying dividends while reducing their share counts. There are 17 companies on the list, and DeSanctis didn’t put them in any particular order.
So first we will list them by dividend yield:
|Flowers Foods Inc.||/zigman2/quotes/201762788/composite FLO||Food: Specialty/ Candy||4.29%|
|Federated Investors Inc. Class B||Investment Managers||3.10%|
|Packaging Corp. of America||/zigman2/quotes/207413697/composite PKG||Containers/ Packaging||2.80%|
|Huntington Bancshares Inc.||/zigman2/quotes/209314988/composite HBAN||Regional Banking||2.80%|
|KAR Auction Services Inc.||/zigman2/quotes/205879305/composite KAR||Misc. Commercial Services||2.74%|
|American Eagle Outfitters Inc.||/zigman2/quotes/209429711/composite AEO||Apparel/ Footwear Retail||2.70%|
|Dean Foods Co.||Food: Meat/ Fish/ Dairy||2.09%|
|Science Applications International Corp.||/zigman2/quotes/202740286/composite SAIC||Information Technology Services||1.94%|
|Nexstar Broadcasting Group Inc. Class A||/zigman2/quotes/202513438/composite NXST||Broadcasting||1.82%|
|Foot Locker Inc.||/zigman2/quotes/204092533/composite FL||Apparel/ Footwear Retail||1.68%|
|Orbital ATK Inc.||Aerospace & Defense||1.59%|
|Standard Motor Products Inc.||/zigman2/quotes/205819127/composite SMP||Automotive Aftermarket||1.52%|
|Oshkosh Corp.||/zigman2/quotes/200559252/composite OSK||Trucks/ Construction/ Farm Machinery||1.41%|
|Graphic Packaging Holding Co.||/zigman2/quotes/203517136/composite GPK||Containers/ Packaging||1.39%|
|Lithia Motors Inc. Class A||/zigman2/quotes/202974783/composite LAD||Specialty Stores||1.21%|
|Fortune Brands Home & Security Inc.||/zigman2/quotes/202019304/composite FBHS||Building Products||1.01%|
|Maximus Inc.||/zigman2/quotes/200056415/composite MMS||Misc. Commercial Services||0.31%|
|Sources: Jefferies, FactSet|
The dividend yield is not necessarily the point here. Jefferies aimed to emphasize the growth potential of the companies.
Here’s the list again, ordered by the implied 12-month upside potential, based on consensus price targets among analysts polled by FactSet:
|Company||Ticker||Share of analysts with ‘buy’ ratings||Closing price - Aug. 3||Consensus price target||Implied 12-month upside potential|
|Nextar Broadcasting Group Inc. Class A||/zigman2/quotes/202513438/composite NXST||100%||$52.72||$66.17||26%|
|Lithia Motors Inc. Class A||/zigman2/quotes/202974783/composite LAD||77%||$82.77||$101.73||23%|
|Orbital ATK Inc.||83%||$75.43||$92.67||23%|
|Dean Foods Co.||38%||$17.21||$20.45||19%|
|Foot Locker Inc.||/zigman2/quotes/204092533/composite FL||73%||$65.64||$75.70||15%|
|KAR Auction Services Inc.||/zigman2/quotes/205879305/composite KAR||82%||$42.28||$48.11||14%|
|Maximus Inc.||/zigman2/quotes/200056415/composite MMS||91%||$58.82||$65.30||11%|
|Graphic Packaging Holding Co.||/zigman2/quotes/203517136/composite GPK||100%||$14.34||$15.61||9%|
|American Eagle Outfitters Inc.||/zigman2/quotes/209429711/composite AEO||56%||$18.54||$20.08||8%|
|Oshkosh Corp.||/zigman2/quotes/200559252/composite OSK||67%||$53.93||$58.09||8%|
|Standard Motor Products Inc.||/zigman2/quotes/205819127/composite SMP||50%||$44.81||$47.33||6%|
|Huntington Bancshares Inc.||/zigman2/quotes/209314988/composite HBAN||35%||$10.01||$10.50||5%|
|Science Applications International Corp.||/zigman2/quotes/202740286/composite SAIC||71%||$63.81||$65.40||2%|
|Fortune Bands Home & Security Inc.||/zigman2/quotes/202019304/composite FBHS||44%||$63.56||$63.90||1%|
|Packaging Corp. of America||/zigman2/quotes/207413697/composite PKG||47%||$78.63||$77.42||-2%|
|Flowers Foods Inc.||/zigman2/quotes/201762788/composite FLO||13%||$14.91||$14.57||-2%|
|Federated Investors Inc. Class B||22%||$32.30||$30.75||-5%|
|Sources: Jefferies, FactSet|
These companies have shareholder-friendly management, they pay dividends and reduce their share counts. If you consider any of these stocks for your own portfolio, it’s important to do your own research, hopefully with the help of a broker or investment adviser, and understand the companies’ business strategies. Once you feel comfortable that a company is on the right path to defend and grow its business for many years, you may have found a long-term winner.