Goldman Sachs Creates a Dividend+Buybacks Measure, and Four Insurer Stocks Shine
Value investors often look closely at dividend policies as a part of total return on an investment and an indicator of the financial strength and prospects for a company.
But dividends aren’t the only way that companies return money to investors. Many companies spend as much or more on stock buybacks on the open market. Such buybacks can reduce shares outstanding and increase earnings per share, even when a company isn’t increasing its net income.
Goldman Sachs (GS) researchers recently released a report highlighting companies that combine dividend payments with big buyback programs. By summing up the impact of the dividend yield and the EPS accretion due to buybacks, Goldman Sachs came up with a number that reflects companies’ total direct spending on investors.
Four insurance companies occupied spots high on the list: No. 10. Validus Holdings Ltd. (VR) with a combination of yield and accretion totaling 8.5%; No. 4, Ameriprise, (AMP) 11.9%; No. 2, Travelers Inc. (TRV) with 17.5% and No. 1, Assurant Inc. (AIZ) with a total of 21.1%.
Validus, based in Pembroke, Bermuda, is a large reinsurer and specialty insurer. Ameriprise, which was spun out of American Express in 2005 is a wealth management and mutual fund operator, but it has a significant home and life insurance business as well as an annuities business. Travelers is a diverse consumer and business insurance firm and Assurant owns a number of specialty insurance subsidiaries.
In each of these companies the buybacks played a much bigger role than dividend yield. Indeed, their yields are relatively puny.
These payouts remain small even though the companies have steadily raised dividend rates since the end of 2009.
But their buyback programs, which generally peak in the fourth calendar quarter, also represent a return to investors, and according to the Goldman Sachs report, they often have a much bigger impact on the stock due to reductions in shares outstanding.
Book value per share rises more swiftly, as shares are fewer.
Many companies tout their buyback programs as a way to return capital to shareholders. Buybacks give companies flexibility to use cash as needed for acquisitions or to hedge against business downturns. Quarterly dividend levels typically are set with a view that the company will continue paying the same or more in the future. A dividend cut or omission is a black mark in investors’ eyes.
But buyback programs have critics as well. Some investors complain that the buybacks go to investors who are selling the stock, not loyal shareholders. Continuing shareholders would presumably prefer higher dividends. Analysts also note that buyback programs at some companies barely offset new shares that are issued under stock option plans. In those cases, the shares bought back merely balance the dilution that occurs when executives and other employees get big stock awards.
The combination of buybacks and dividend growth appears to work in boosting shareholder value. Three of the four insurers that the Goldman Sachs report surfaced have outpaced the market during the past 12 months, as seen in a stock chart.
And investors can anticipate that these companies will continue to buy back shares. Validus, which spent $204 million buying back shares in a Dutch auction last June, still had $166.4 million left in its stock repurchase program after the repurchase. Ameriprise added $2 billion to its stock repurchase program in June, 2011. As of June 30, 2012, Travelers had $2.9 billion authorized for repurchases.
And last May, Assurant added $600 million to the $170 million that remained from existing repurchase authorizations. At the time, Robert B. Pollock, Assurant’s president and chief executive officer, said: “Assurant's disciplined share repurchase strategy illustrates our commitment to deliver significant value to our shareholders, resulting in the purchase of approximately 43 percent of the company's common shares outstanding during the past eight years.”
Moreover, all these companies appear to have ample capacity to boost their dividends, with current payout ratios well under 30%.
Looking for companies that return money to shareholders can signal solid investment opportunities.