• Introduction
  • Top Shareholder Yield Stocks Have Significantly Underperformed
  • TSY Stocks Outperformed Significantly When Their Index Weights Fell to Levels Similar to Current Levels
  • Top Shareholder Yield Stocks Look More Attractive Than the Universe and Especially Diluters
  • Kailash Picks Within Top Shareholder Yield Stocks Are Even More Attractive
  • Conclusion: Likely Fat Pitch in High Shareholder Yield Stocks
  • Exhibits: Lists of Top Shareholder Yield Stocks

Introduction

In our prior paper Politicians and Corporate Stock Repurchases – Getting the Facts Straight in This Politicized Issue, we discussed the recent outcry by some politicians and media figures about the large amounts of stock repurchases being implemented by U.S. firms. We surmised that while some of the concerns may seem valid, the claims made to support these concerns simply do not hold true for corporate buybacks in aggregate. In particular, we find that:

  1. Buybacks are primarily funded from very strong FCF
  2. Net debt compared to market cap are near 25-year lows
  3. Strong stock buybacks do not seem to be starving firms of investments in capex or R&D. In fact, in aggregate these investments are at or near record high levels.

One might even argue that firms may want to consider cutting back on capex given how late we are in the economic cycle to generate more cash to return to shareholders. Lastly, we are very cautious on the idea that politicians should become involved in making capital allocation decisions for companies. In the prior paper we go into further detail regarding the differences between Large Cap and Small & Mid Cap for these findings but would reiterate that in aggregate all of the previously mentioned findings are true.

In this paper we examine the investment implications of stock repurchases and in particular shareholder yield. The analysis will focus primarily on the top stocks in terms of total shareholder yield (i.e., net stock buybacks and dividends divided by market cap) which shows how much cash is effectively returned to shareholders each year. For the Large Cap Russell 1000 universe we will consider the top shareholder yield (“TSY”) group to be the top 50 stocks on shareholder yield while the Small & Mid Cap universe TSY group will be the top 100 stocks. Sensing an opportunity from our prior work on stock repurchases, we were still surprised how compelling the current investment opportunity appears.

Our primary findings from this paper are:

1. In a world that is supposedly starved for yield, the firms with the biggest shareholder yields have been sold with ruthless abandon and may represent a compelling and rare investment opportunity.

2. Historically, when the valuations for top shareholder yield stocks were depressed and their index weighting was near the record lows seen today, these stocks have historically gone on to crush their benchmarks over the next 12 months by huge margins1.

3. TSY stocks today look more attractive than the broad index and to their own history on the vast majority of fundamental metrics we analyzed.

4. Leveraging the Kailash Capital (“Kailash”) Ranking Tools and portfolios has historically made a great opportunity even greater by significantly improving the expected forward return.

  1. As a reminder for our Financial Advisors: our models are available on a continuous basis, and most have been in production for over a decade.  If you are looking for simple, concentrated, low turnover, and tax efficient model portfolios we would like to talk with you.  KCR also offers a wide range of easy-to-use but sophisticated tools.  Our toolkits can help identify mispriced stocks with the best and worst risk/reward characteristics, estimate a stock’s duration and warn you when a company is engaging in low-quality accounting. Over the last 12 years, KCR has built and offers time-tested and class-leading products built by experienced and proven money managers for fixed to low prices.
  2. Kailash Capital’s sister company, L2 Asset Management, runs market neutral, long/short, large-cap, and mid-cap long-only portfolios with a value and quality bias.  L2 employs a highly disciplined investment process characterized by moderate concentration, low turnover, high tax efficiency, and low fees. While nobody can predict the future, we believe the recent resurgence in risk-adjusted returns seen across all products is the beginning of what may be a long period where speculation is punished, and prudence and patience rewarded.
The topics discussed in this article are aimed at seasoned professionals, as such, we have included some extra reading for anyone seeking out more information related to the topics above.

  1. Click the following to read more about Carvana Earnings

Disclaimer

The information, data, analyses, and opinions presented herein (a) do not constitute investment advice, (b) are provided solely for informational purposes and therefore are not, individually or collectively, an offer to buy or sell a security, (c) are not warranted to be correct, complete or accurate, and (d) are subject to change without notice. Kailash Capital, LLC and its affiliates (collectively, “Kailash Capital”) shall not be responsible for any trading decisions, damages or other losses resulting from, or related to, the information, data, analyses or opinions or their use. The information herein may not be reproduced or retransmitted in any manner without the prior written consent of Kailash Capital. In preparing the information, data, analyses, and opinions presented herein, Kailash Capital has obtained data, statistics, and information from sources it believes to be reliable. Kailash Capital, however, does not perform an audit or seeks independent verification of any of the data, statistics, and information it receives. Kailash Capital and its affiliates do not provide tax, legal, or accounting advice. This material has been prepared for informational purposes only and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction. © 2021 Kailash Capital, LLC – All rights reserved.

Nothing herein shall limit or restrict the right of affiliates of Kailash Capital, LLC to perform investment management or advisory services for any other persons or entities. Furthermore, nothing herein shall limit or restrict affiliates of Kailash Capital, LLC from buying, selling or trading securities or other investments for their own accounts or for the accounts of their clients. Affiliates of Kailash Capital, LLC may at any time have, acquire, increase, decrease or dispose of the securities or other investments referenced in this publication. Kailash Capital, LLC shall have no obligation to recommend securities or investments in this publication as result of its affiliates’ investment activities for their own accounts or for the accounts of their clients.

February 11, 2016 |

Categories: White Papers

February 11, 2016

Categories: White Papers

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