"TAP não sobrevive se se mantiver pública", garante Pinto Luz

[Supermann]

Ainda mais importante que o D Yield...

A wonderful paper scheduled for April publication in the Journal of Finance takes a new twist on the Dogs of the Dow strategy. The paper, by Boudoukh, Michaely, Rishardson, and Roberts is titled, "On the Importance of Payout Yield". SmartMoney magazine also has a good overview of the paper in their "Stockscreen" column.

In an earlier post we examined a few Dogs of the Dow strategies. One of the problems with the original Dogs strategy (buy the top 10 yielding stocks in the Dow, rebalance yearly) is that the performance has deteriorated in the past decade or two. Below we will examine this new strategy based on payout yield (and leave a comment if you have a name suggestion for this strategy which I will track on Stockpickr).

Dividends are only one way of returning capital to shareholders. Share repurchases are another such method (see Microsoft (MSFT)), and since they are not taxed like dividends, it can be argued they are a more efficent way of returning profits. Buybacks represent about half of all shareholder payouts, and have increased steadily since the early 1980's. There is a structural reason for this, and is due primarily to the SEC instituting rule 10b-18 in 1982 - providing a safe harbor for firms conducting repurchases from stock manipulation charges. See Grullon and Michaely [2002] for more info on the impact of Rule 10b-18.

The authors examined the payout yield and net payout yield, whose formula is:

Payout Yield = $ spent on dividends + $ spent on share repurchases
(Net payout is simply subtracting the $ raised through new share issues to the above formula)

The authors find that "the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholders." Additionally, while dividend yield has lost its predictive ability over time, the payout yield has remained a robust indicator for excess stock return.

From 1983 - 2003 the various strategies returned:

Dow: 13.4%
DOGS: 16.2%
NPY: 19.1%

The current names will be tracked here:
(in descending order of NPY)

E.I. du Pont de Nemours & Company (DD)
Disney (DIS)
Caterpillar Inc. (CAT)
Microsoft (MSFT)
Exxon Mobile (XOM)
Procter & Gamble (PG)
Intel (INTC)
Citigroup (C)
3M Company (MMM)
Pfizer (PFE)

ABSTRACT

Previous research showed that the dividend yield process changed remarkably during the 1980’s and 1990’s, but that the payout yield (dividends plus repurchases over price) changed very little. As such, we investigate the empirical implications of using various measures of payout yield rather than dividend yield for asset pricing models. We find that the widely documented decline in the predictive power of dividends for excess stock returns is due largely to the omission of alternative channels by which firms distribute and receive cash from shareholders. Statistically and economically significant predictability is found in the time series when payout (dividends plus repurchases) and net payout (dividends plus repurchases minus equity issuances) yields are used instead of dividend yield. In the cross-section, we find that payout yield contains information about expected stock returns exceeding that of dividend yield and that the high minus low payout yield portfolio is a priced factor. Finally, we show that trading on this characteristic leads to excess profits that can not be explained by the traditional risk factors

[LTCM]

Rapid economic growth isn't necessary to generate healthy stock-market returns.

By Jeremy J. Siegel

April 2010

Granted, it's been a rough decade for stock-market investors. But even if you include the past ten years, the long-term return on stocks has been between 6% and 7% per year after inflation. And that return has dominated all other asset classes. Recently, a few investment gurus -- led by Pimco's Bill Gross and Mohamed El-Erian -- have predicted that future returns on stocks will disappoint investors. They've coined the term new normal to represent the slow-growth economy -- and diminished stock returns -- that they believe investors can expect in the future.

But I would take issue with their assumptions. Rapid economic growth isn't necessary to generate healthy stock-market returns. In fact, based solely on current share prices and the market's current earnings power, stocks should be very rewarding for long-term investors.

Projected returns. Stock investors can project their returns using techniques similar to those that bondholders use. A bond promises to pay a fixed coupon year after year, and the expected return on the bond can be expressed as the coupon divided by the price of the bond. Although stockholders do not have a guaranteed coupon, they do have a claim on a company's earnings. As of February 15, the price-earnings ratio of Standard & Poor's 500-stock index, based on estimated 2010 profits, stood at 14.2. If we take that P/E and stand it on its head, effectively calculating the market's earnings-to-price ratio, we get 7.1%. That figure is known as the market's "earnings yield" and represents the return that investors would receive if the companies in the S&P 500 paid out all of their earnings as dividends. That far exceeds the recent yield of 3.7% on a ten-year Treasury note or even 4.6% on a 30-year bond.

Proponents of bonds will point out that although stocks might be projected to earn 7.1%, the market's current dividend yield -- representing the cold, hard cash actually paid to stockholders -- is only 2.1%. However, earnings that are not paid out can be reinvested by management. That alone has helped dividends grow at a 5% annualized rate over the long term. Even if a company lacks opportunities for growth, management can use the excess cash to increase dividends or buy back shares, which should, at least in theory, prop up a stock's price. Any capital gains should be added to the dividend yield to calculate total stock returns.

Even the three- to four-percentage-point difference between stock and bond yields understates the advantages of stocks. Most government bonds aren't adjusted for inflation, so investors receive the same number of dollars in the future as they do today, even if inflation wipes out a substantial part of their purchasing power. In contrast, stocks are claims on real assets, such as land, factories and equipment, as well as the ideas, patents and all other capital that generate corporate profits and appreciate over time with the general level of prices. So that 7.1% yield on stocks can be considered the expected real, or after-inflation, return.

Of course, you can buy Treasury bonds that are indexed to inflation (see Why You Need TIPS). But the current real yield on ten-year Treasury inflation-protected securities is just 1.4%, and 2.1% on 30-year bonds. The projected returns from stocks, at five to six percentage points above those yields, are generous by historical standards.

Skeptics will point out that earnings estimates may not be realized. But in sharp contrast to the past two years, analysts have been aggressively boosting their estimates for 2010 after a near-record number of firms beat projections for the fourth quarter of 2009. And with prospects poor for juicy returns in the bond market, there are good reasons to believe stocks will outpace bonds in the coming year and over the long haul.

Columnist Jeremy J. Siegel is a professor at the University of Pennsylvania's Wharton School and the author of Stocks for the Long Run and The Future for Investors.