Profitable companies have an important decision to make: How should cash on the balance sheet be deployed? It can be used to fund growth-focused reinvestment or acquisitions. Companies could also save the extra cash, or use it to pay down debt. If they want to put money back in shareholders' pockets quickly, they could pay dividends or buy back their common stock.
Whether either dividends or buybacks are more preferable depends on who you ask. Investors have long cherished dividends for their income stream and as a key component of long-term return. But in the past 30 years or so we have witnessed a paradigm shift. Companies have increasingly elected to use cash to buy back their own shares--in tandem with dividends or in lieu of. A signal of confidence from those most intimately familiar with the business, share repurchase programs have the benefit of flexibility and can be tax advantaged relative to dividends, said Dan Lefkovitz, a strategist for Morningstar Indexes. Starting in the early 1980s, share repurchases have steadily gained popularity, to the point of eclipsing dividends.
Both capital allocation decisions are shareholder-friendly. Whether by obtaining a dividend payment or increasing their fractional ownership as a result of a buyback, investors benefit. And it's often not an either-or proposition anyway: many companies pay dividends and opportunistically buy back shares.
The Morningstar US Dividend and Buyback Index is composed of companies that return profits to investors through dividends, buybacks, or a combination--what we refer to as total shareholder yield. Stocks are selected from the Morningstar US Market Index based on total shareholder yield, a combination of dividend yield and net buyback yield. Dividends are not required to be qualified income, so real estate investment trusts are eligible. Net buyback yield, which controls for companies issuing new shares (dilution), is averaged over eight trailing quarters. Only those companies that have returned capital to shareholders over that span are included.
The table lists 10 undervalued components of the US Dividend and Buyback Index. Below, we provide links to each company's Analyst Report and the details of publicly announced share buyback programs.
- Cardinal Health (CAH): current $1 billion share repurchase plan
- L Brands (LB): current $250 million share repurchase plan
- McKesson (MCK): current $4 billion share repurchase plan
- Johnson Controls International (JCI): current $1 billion share repurchase plan
- Allergan (AGN): current $2 billion share repurchase plan
- Invesco (IVZ): No publicly announced share repurchase plan
- CVS Health (CVS): No publicly announced share repurchase plan
- Expedia Group (EXPE): Current 15 million shares repurchase plan
- General Motors (GM) : Current $5 billion share repurchase plan
- American International Group (AIG): Current $2 billion share repurchase plan
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Karen Wallace does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.