Andrew Bary

Many investors like to buy companies that return gobs of cash to investors through a combination of stock repurchases and dividends.

A high return of capital to shareholders can be doubly favorable. It's an indicator of strong free cash-flow generation and shows that companies are willing to share that bounty with their investor base. It can also be a strong management endorsement of the stock.

So which companies rank highly by this measure?

General Motors, Marathon Petroleum, Wells Fargo, and American International Group are up near the top of the list among companies in the S&P 500 index. They have total yields (buyback yield plus dividend yield) of more than 15% in the past 12 months, according to research from Goldman Sachs.

Rounding out a list of a dozen companies with total yields of 10% or more are State Street, Jabil, Expedia, MGM Resorts International, Archer Daniels-Midland, Altria Group, Dupont and Comcast.

Most of the total yield on the list comes from stock buybacks with GM, Jabil, Expedia and MGM Resorts paying dividends of 1% or less. The big buybacks are a signal that management thinks the stocks are particularly cheap.

Stock performance so far this year is mixed, however, with most of the dozen trailing the 23% total return on the S&P 500 index. Over time, a focus on total yield can pay off.

GM tops the list with a roughly 50% gain this year. Much of its buyback came in one fell swoop in late 2023 when it did a well-timed $10 billion repurchase when the stock traded in the 30s. It's now trading around $53. It has bought back more than 20% of its stock in the past year.

Big one-time buybacks can skew the results since investors now may be more interested in ongoing stock repurchases. GM continues to repurchase stock but at a slower rate with the company buying back $1 billion of stock in the third quarter, which would mean a roughly 6% annual buyback if continued over 12 months.

Wells Fargo's heavy stock repurchases have paid off with the stock recently rallying about 20% on rising investor optimism about the bank's outlook amid hope that a longstanding asset cap that has damped earnings will be removed by banking regulators in 2025.

Wells Fargo did slow its stock repurchases in the third quarter to $3.5 billion from $6 billion per quarter in the first half of this year. That's a still ample annual rate of 6.5% but half the rate of the past year.

Altria, the tobacco company, is the only company on the list with a focus on dividends. With its stock around $50, Altria yields over 8%, second in the S&P 500 to Walgreens Boots Alliance. Altria aims to pay out about 80% of its earnings in dividends and boost the payout at mid-single digit annual pace through 2028.

Big stock repurchases can backfire if companies overpay. That has been the case with companies like Charter Communications and Sirius XM Holdings in recent years.

The Invesco Buyback Achievers exchange-traded fund $(PKW)$ is among the few ETFs with a repurchase orientation. It buys stocks of companies that have retired at least 5% of their shares over the prior 12 months and is reconstituted annually in January. Some of its largest holdings are AIG, PayPal Holdings, Aflac and MetLife.

Write to Andrew Bary at andrew.bary@barrons.com

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October 24, 2024 01:30 ET (05:30 GMT)

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