The Shareholder Yield Explained.

The Shareholder Yield is a metric that measures how a company rewards its shareholders through three ways. Issuing dividends, conducting share buybacks, or reducing the company’s debt. This formula helps in evaluating how effectively a company distributes its resources, which ultimately benefits its shareholders.

When analysing distributions, shareholders usually focus on cash dividends. However, intelligent share buybacks and reducing the burden on the company’s balance sheet also indirectly benefit shareholders and contribute to overall returns. Consistent, strong shareholder yields can indicate management’s commitment to delivering value and returns to its shareholders.

Shareholder yield is a term that we came up with to reflect the various ways dividends can be paid to owners of a business in a publicly-traded company.

William Priest

By understanding this metric, shareholders can evaluate how a business strategically allocates its profits and free cash flow. Diligent capital allocation, whether in the form of dividends, strategic acquisitions, buybacks at the right value, or reducing debt, is one of the best ways to create shareholder value.

The Shareholder Yield formula considers all the ways management returns value to its owners, and it is an effective way to highlight management’s alignment with shareholders. Shareholder returns can be achieved beyond a dividend payout, and this formula incorporates all the methods through which management can reward its shareholders.

Why is the Shareholders Yield an important Metric?

The Shareholder’s Yield is a relatively new but powerful formula that helps measure equity returns. The metric covers various methods that management uses to return capital to its equity owners. This provides a better way to measure returns than just the popular dividend yield.

By analysing how a firm’s free cash flow is used, we can understand equity returns in greater detail. The management of a profitable business with free cash flow can use the FCF in various ways. Management can issue dividends and ensure that it has enough working capital to sustain growth. Alternatively, they can use it to buy back shares at the right price, effectively minimizing the free float available.

Reducing debt is another option that improves the balance sheet’s health and frees up more cash flow by eliminating the need to service interest payments. They could also reinvest back into the company, improving operations, and enhancing efficiency and profitability. Management can also expand by making acquisitions that add value to the overall business when carried out prudently.

There has been a shift from the standard methods of evaluating equity returns, and I think the Shareholder Yield provides a clearer picture of overall returns. The formula forces investors to look at all aspects of the business and how management approaches each of the categories.

A positive shareholder yield is desirable, indicating signs of value creation for shareholders. A negative yield can also provide investors with a glance into issues within a business. For example, management may issue a healthy dividend, and buy back shares at a reasonable price. However, the overall Shareholder Yield may be negative due to the company taking on a lot of debt. By understanding which part of the formula is negatively impacting the yield we can narrow down our focus to that area.

What is the Shareholder Yield Formula?

• Shareholder Yield = (Cash Dividends + Net Share Repurchases + Net Debt Paydown) ÷ Market Capitalisation
• OR Dividend Yield + Buyback Yield + Debt Paydown Yield
• Dividend Yield (%) = Cash Dividends ÷ Market Cap x 100
• Buyback Yield (%) = Net Share Repurchases ÷ Market Cap x 100
• Debt Paydown Yield (%) = Net Debt Paydown ÷ Market Cap x 100

There are two simple ways to measure the overall shareholder return. The most common is (Cash Dividends + Net Share Repurchases + Net Debt Paydown) ÷ Market Capitalisation however you can also simply add the three yields together (Dividend Yield + Buyback Yield + Debt Paydown Yield).

Dividend Yield

Cash Dividends are the amount of dividends declared by the company and paid out to shareholders. This is physical money-changing hands that shareholders receive. To determine the Dividend Yield we use the below formula.

Dividend Yield (%) = Cash Dividends ÷ Market Cap x 100

Share Buybacks

Net Share Repurchases are the difference between the amount of money spent on share repurchases and the amount of share issuances. A company can raise capital by issuing more shares and diluting shareholders or by reducing the amount of shares on the free float by buying them back. The yield is based on how much shares have been repurchased over the last twelve months. To find this we look to the cash flow statement and look at net common equity.

Buyback Yield (%) = Net Share Repurchases ÷ Market Cap x 100

Debt Paydown

The Net Debt Paydown is simply the difference between the amount of debt that has been paid down and the amount of debt issued over a given period. The yield is the change in average of four quarters of the long-term debt.

Debt Paydown Yield (%) = Net Debt Paydown ÷ Market Cap x 100

How to use the Shareholder Yield?

Let’s run through a couple of examples to see how we can use the shareholder yield when analysing companies. Assuming we have all the metrics required and are comparing two companies with a similar market cap in the same industry.

Yield	Company A	Company B
Dividend Yield %	1.75%	3.6%
Buyback Yield %	7.1%	2%
Debt Paydown Yield %	0.95%	1.5%
Shareholder Yield %	9.8%	7.1%

We can see that Company A is the clear winner with a higher Shareholder Yield. If we were screening based on Dividend Yield alone, we would not be taking full advantage of Company A’s more efficient use of capital.

By incorporating the three ways that management can reward shareholders we have a deeper look at how this can impact equity returns in the long run. Company A based on its reasonable debt reduction and strategic buybacks appears to be a better opportunity all things being equal.

Let’s walk through another example based on the evaluation of a company where we have all the details. After evaluating the financial statements we come up with the following numbers to build out our formula.

• Dividends Declared: $27.5 million
• Dividends Paid out in Cash: $18 million
• Share Buybacks: $12.2 million
• Shares Issued via Cap Raise: $4.75 million
• Debt Reduction: $17.5 million
• Outstanding Shares: 150,000,000
• Current Share Price: $9.75

The formula:

Shareholder Yield = $18m + ($12.2m – $4.75m) + $17.5m ÷ $1.462b x 100

Shareholder’s Yield = 2.93%

In Summary…

When assessing investment opportunities, it’s crucial to evaluate the return management provides to shareholders. An important aspect of sound valuation is to examine how free cash flow is strategically allocated. This is where shareholder yield comes into play, as it provides a holistic approach to assessing management’s commitment to providing returns to its equity owners.

A higher shareholder yield is desirable, much like a higher dividend yield, as long as it is sustainable and consistent. A higher yield reflects the alignment and commitment between management and shareholders.

The shareholder yield is a useful tool for me because I’m not necessarily focused on dividend-paying companies. I want management to be able to reinvest in growth and use free cash flow to create further value without paying out cash until it can sustain itself.

This yield allows me to examine the returns of companies that don’t issue dividends. If you adopt a buy-and-hold strategy, then this yield can provide valuable insight into the equity returns of holdings that don’t use cash payments.

Shareholder yield is a great tool for analysing companies and forms a key metric when estimating the annual returns of an investment idea. Many companies don’t issue dividends and instead choose to reward shareholders by reducing debt and buying back shares. Now investors have a way to measure these decisions and determine how value is being created.