A Different Kind of Yield to Consider - Investment Ideas

Companies have several options when it comes to deploying their extra dough. They can make acquisitions, fund organic growth, pay down debt, or return it to shareholders through dividends or stock buybacks.

Of course, a company can just let that money sit in the bank and grow its cash hoard. But with interest rates near record lows, they're generating very low returns for their shareholders.

Ideally, a company should use its capital to maximize long-term value for its shareholders. But clearly some managers understand this concept better than others. Many corporate executives are more concerned about empire-building than producing high returns on capital and often make reckless decisions with shareholders' money that destroys value over time.

If you own a company for the long-run, make sure you know how it is managing its cash.

Shareholder Yield

It's not uncommon for companies to distribute more and more cash to shareholders as they mature. Bigger companies have less growth opportunities and compete in crowded markets, so they plow back less of their earnings into the company and more into shareholders' wallets. And dividends, along with stock buybacks, are the quickest and surest way to return value to shareholders.

The total amount of cash a company spends on dividends and share buybacks as a percentage of its market cap is referred to as shareholder yield. While many growth investors might scoff at companies that return a lot of cash to shareholders, history shows that, on average, stocks with high shareholder yield significantly outperform stocks with low shareholder yield over the long run.

Buyer Beware

When a company actually buys back its shares, it has a direct benefit in that it reduces the number of shares outstanding. This means that earnings are divided among fewer shares. In other words, your piece of the pie just got bigger.

If a company has the excess funds and their stock is undervalued, buybacks can add tremendous value over time. But make no mistake: stock buybacks don't always add value. In fact, companies are often bad at timing their repurchases, buying when their share price is expensive and hoarding cash when it is cheap.

The cash allocated to their overvalued stock would have been better spent investing for growth, paying a higher dividend, or just leaving it in the bank.

So make sure the underlying business is sound and the stock is reasonably priced before investing in a company that's buying back its own stock. Because all the buybacks in the world won't save a company headed off a cliff.

One way to avoid stocks heading over a cliff is to look at the direction of consensus earnings estimates. When analysts revise a company's estimates lower, it's usually a sign of weakening underlying fundamentals. So look for stocks with at least stable consensus estimates - or better yet, look for ones with rising estimates. And there's no better gauge of a company's earnings momentum than the Zacks Rank.

4 Shareholder-Friendly Companies

With that in mind, here are 4 companies with high shareholder yields and a Zacks Rank of 3 or better:

Caterpillar (CAT)

Market Cap: $55.2 billion
Net Share Buybacks (Trailing Twelve Months): $3.97 billion (7.2% of market cap)
Dividends Paid (Trailing Twelve Months): $1.59 billion (2.9% of market cap)
Shareholder Yield: 10.1%
Zacks Rank: 3

Western Union (WU)

Market Cap: $9.0 billion
Net Share Buybacks (TTM): $509 million (5.7% of market cap)
Dividends Paid (TTM): $269 million (3.0% of market cap)
Shareholder Yield: 8.7%
Zacks Rank: 2

Seagate Technologies (STX)

Market Cap: $21.1 billion
Net Share Buybacks (TTM): $1,806 million (8.5% of market cap)
Dividends Paid (TTM): $562 million (2.7% of market cap)
Shareholder Yield: 11.2%
Zacks Rank: 3

Darden Restaurants (DRI)

Market Cap: $7.7 billion
Net Share Buybacks (TTM): $442 million (5.8% of market cap)
Dividends Paid (TTM): $289 million (3.8% of market cap)
Shareholder Yield: 9.6%
Zacks Rank: 2

The Bottom Line

Companies have several options when it comes to deploying their excess cash. These 4 firms are choosing to return value to shareholders through solid dividends and big stock buybacks.

Todd Bunton, CFA is a Stock Strategist for Zacks Investment Research and Editor of the Income Plus Investor and Surprise Trader services.

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