Shareholder Yield
A ratio indicating how much money shareholders receive from the company in the form of cash dividends, net stock repurchases, and debt reduction
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What is Shareholder Yield?
Shareholder yield refers to how much money shareholders receive from a company that is in the form of cash dividends, net stock repurchases, and debt reduction.
Understanding Shareholder Yield
The term was first used by Epoch Investment Partners’ William Priest in his 2005 paper entitled, “The Case for Shareholder Yield as a Dominant Driver of Future Equity Returns.”
In a Forbes interview, William Priest indicated that “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.”
He describes five things that a company can do with its free cash flow:
- Paying a cash dividend
- Buying back stock
- Paying down debt
- Reinvesting in the company
- Making acquisitions
Of the five, he outlined that paying a cash dividend, buying back stock, and paying down debt are all essentially dividends to investors and exert the same effect on the shareholder.
Formula
Where:
- Cash Dividends are the amount of dividends declared and paid by the company
- Net Share Repurchases is the difference between the dollar amount of share repurchases and the dollar amount of share issuances
- Net Debt Paydown is the difference between the amount of debt paid down and the amount of debt issued
- Market Capitalization is the value that the company trades at on the stock market
An alternative calculation is to use cash dividends and net share purchases in the denominator and exclude net debt paydown.
Example
John is looking to determine the shareholder yield of a company using the information below:
- Dividends declared: $100,000
- Cash dividends paid: $50,000
- Share repurchases: $150,000
- Share issuances: $51,000
- Debt paydown: $100,000
- Shares outstanding: 500,000
- Price per share: $12
Based on the information above, what is the yield? The yield can be calculated as:
Shareholder Yield = 4.15%
Interpretation
A higher shareholder yield is always desirable, as it indicates that the company is returning value to shareholders through a combination of cash dividends, share repurchases, or debt paydown. As indicated by Priest, all three methods are ways that a company can distribute cash to shareholders.
With the growing number of share buybacks replacing cash dividends as the method of returning cash to shareholders, shareholder yield is powerful in that it incorporates both share repurchases and cash dividends in its calculation. Therefore, it is a popular alternative to the dividend yield.
Additional Resources
CFI offers the Financial Modeling & Valuation Analyst (FMVA)™ certification program for those looking to take their careers to the next level. To keep learning and advancing your career, the following CFI resources will be helpful:
