Hiding in plain sight: a 9% adjusted shareholder yield.

For many years, we focused primarily on dividend yields. In earlier decades, high dividend yields were relatively easy to find, but over time they’ve steadily declined. When we broadened our criteria, we discovered something new: Shareholder Yield. Though we coined the term internally, it has since become widely used — logically arrived at by other researchers as well.

Shareholder Yield is defined as the sum of:

• Cash dividends
• Net share repurchases
• Net changes in debt

This metric was especially valuable when our investment model emphasized Value and treated Growth as a secondary consideration.

About 25 years ago, Larry shifted the focus of the model to highlight Growth. Shareholder Yield remained in the model, but the goal became outperforming the S&P 500. The updated model exceeded our expectations — and we began paying less attention to Shareholder Yield.

With the disruption caused by the pandemic, we re-evaluated all aspects of the model in anticipation of changes to corporate financial reporting. One surprising result: we found the average adjusted Shareholder Yield in our model accounts to be 9% — even before factoring in debt changes. This is an extraordinary number.

But what about corporate debt? We often hear concerns about companies borrowing to fund share buybacks. Fortunately, that’s not a concern in our buy portfolio. The companies we own have an average Free Cash Flow of 12% — more than enough to cover the 9% needed for dividends and share repurchases.

This insight helps explain why our model has performed so well. When combined with a growing business, Shareholder Yield plays a larger role than we previously recognized in driving capital gains.

It’s also worth noting that Shareholder Yield can serve as a liquidity source. Selling a few shares of a company with high Shareholder Yield can provide needed income — without changing your percentage ownership in the business.

Katz Family Financial