How Companies Pay Shareholders: Total Shareholder Payout A Better Approach?

A Pile of Cash
(Photo by 401(K) 2012) (CC BY) (Resized/Cropped)
Is there a metric or series of metrics which captures the best of what we learn from looking at the buybacks factor, but avoids some of its shortcomings? Net Payout of Profits just might fit the bill. This metric looks at the percent of profit which is distributed versus the percent of profit which is kept. Don’t misunderstand – I’m not referring to money reinvested – I’m referring to profit after reinvestment. Companies can distribute profit, or “save” it. A Net Profit Payout of 100% means the company “gave” (but remember, it’s not a giveaway, the shareholders bought the right to receive these distributions when they bought the shares) all of its profits to its owners that year.
The data look good. Using a method which divides the data into quintiles (fifths), the top (first) being the highest payout percentage and the bottom (fifth) being the lowest payout, we see that the top two tend to outperform the bottom two in the subsequent calendar year.

Source: FactSet, Vident, Bowyer Research, 12/31/90 – 12/31/19
One of the things which also stands out about the payout ratio is that it works across all the size buckets we looked at: Mega, Large, Mid Cap, and Small Caps, which show overperformance of 2%, 2%, 1% and 7% (!) respectively. Throwing all those cap buckets into one All Cap bucket (everything above 1 billion dollars in valuation), we get a 1% overperformance in the subsequent year.

Source: FactSet, Vident, Bowyer Research, 12/31/90 – 12/31/19
And this factor positively correlates with subsequent annual performance 80% of the time in the data we looked at.
There are various reasons why this might be the case, but the one that comes to mind most easily is a point made by Warren Buffett who looks for what he calls an “owner orientation” in the companies in which he invests. Human nature is such that CEOs might fall into the temptation of empire building with someone else’s money. But a company which pays out a large share of its earnings is showing that it probably does not have an empire building tendency, otherwise the money would be hoarded. On the other hand, as Alex Edmans has argued, companies should not always distribute cash – there may be good reasons to reinvest, but only when there are good reasons to reinvest, is it in the investors interest that the company keep the money. When the company no longer has high impact investments to make inside, it should give the money back to the investors so they can redeploy it where it can have a high impact. Distributing the income puts that decision in the investors’ hands. After all, if the payout is in the form of a buyback, investors don’t have to accept the offer, they can keep the stock, and if the payout comes in the form of a dividend, the investor is perfectly able to take their dividend and turn around and buy more shares.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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