Friday Edition: Dividends, Buybacks and massive profits

This week I am returning to the idea of shareholder yield. Last time we talked about combing high shareholder yields combined with insider buying. One of three picks, Mannatech (MTEX), announced a tender offer this morning, and the stock has shot higher by over 20%.

I find that hysterical since I wrote last week, "In fact, the fact that I hate the MLM aspect of the business probably means this will be the top performer on the list."

So far, this is precisely what happened.

I have been doing a lot of testing around the concept of shareholder yield. It works well across almost all sectors with those stocks with the highest total yield, including buyback percentages, outperforming their sector and major indexes.

Small banks really stand out so far. Over the last 20 years buying smaller bank stocks with high shareholder yields has been a spectacular investing strategy.

Since 2000 this approach has beaten the overall market by more than a 2 to 1 margin.

What's really impressive to me is that in the lost decade of 2000-2010, when the S&P 500 basically broke even, including dividends, shareholder yield-focused small bank investors earned more than 15% annually on average.

That includes using the shareholder yields strategy to pick banks during both the internet bust and the great credit crisis.

During the current bull market, that performance has accelerated with the strategy racking up annualized gains of 24%, easily exceed the S&P 500's remarkable 14% a year.

As you might expect, even banks with high shareholder yields got crushed in march of 2020 when the pandemic began. The portfolio was down close to 30% at one point that month.

It came roaring back as the overall portfolio was up a whopping 46% for the whole year.

So far this year, investors using this approach would be up about 24%.

We do use price to tangible book value to rank stocks in this strategy, but we do not have the same strict adherence to valuation-based buy limits as we do in the Banking on Profits takeover focused portfolio. Because of this high shareholder yield, investors can stay fully invested most of the time.

Several stocks from our current portfolio make the final list of shareholder yield candidates.

We never owned First Financial Northwest (FFNW) in our BOP portfolio, but it is a stock I wrote about several times back in the days of my Real Money column. The bank is located in the Seattle area, which is becoming one of the wealthiest regions in the nation.

While the shareholder yield-based strategy is not really a takeover strategy, all banks in good markets are in play, and I would not fall out of my chair to see an attractive bank in a great market like First Financial Northwest get taken over at a huge profit from today's price at some point.

Buybacks are the driver of shareholder yield in small banks. We have even seen some banks with no dividend make the cut at times because the buyback rate was so high.

There has been a debate for years about stock buybacks. Are the bad of are they good for shareholders.

The answer to that question is yes.

Banks that buy back shares at low multiples of book value and earnings add value.

Buybacks at high multiples destroy value.

I use price-to-tangible book to sort stocks for the portfolio, so we only include stocks that trade at reasonable valuations where buybacks create a great deal of value.

I want to run more tests on strategy tweaks like limiting purchases based on cash yield percentages while insisting on a positive buyback rate as a way to create a more income-focused shareholder yield approach but this core idea about small bank shareholder yields driving returns is a valid as the consolidation trends that drive returns in takeover targets.

I suspect that owning those that qualify on both counts is going to be a huge wealth builder over the next decade.

Posted to The Community Bank Investor… on May 28, 2021 — 3:05 PM
Comments ({[comments.length]})
Sort By:
Loading Comments
No comments. Break the ice and be the first!
Error loading comments Click here to retry
No comments found matching this filter
Want to add a comment? Take me to the new comment box!

Reviews Average Rating          

Excellent and rare quality
See All Reviews →