Shareholder Yield: A Comprehensive Guide to Returns for Investors

Shareholder yield refers to how much money shareholders receive from a company that is in the form of cash dividendsDividendA dividend is a share of profits and retained earnings that a company pays out to its shareholders. When a company generates a profit and accumulates retained earnings, those earnings can be either reinvested in the business or paid out to shareholders as a dividend., 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:

1. Paying a cash dividend
2. Buying back stock
3. Paying down debt
4. Reinvesting in the company
5. 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 repurchasesShare RepurchaseA share repurchase refers to when the management of a public company decides to buy back company shares that were previously sold to the public. A company may decide to repurchase its sharesto send a market signal that its stock price is likely to increase, to inflate financial metrics denominated by the number of shares outstanding (e.g., earnings per share or EPS), or simply because it wants to increase its own equity stake in the company. 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 CapitalizationMarket CapitalizationMarket Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. Market Cap is equal to the current share price multiplied by the number of shares outstanding. The investing community often uses the market capitalization value to rank companies 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 yieldDividend Yield FormulaThe Dividend Yield is a financial ratio that measures the annual value of dividends received relative to the market value per share of a security. It calculates the percentage of a company’s market price of a share that is paid to shareholders in the form of dividends.. See examples, how to calculate.

Additional Resources

CFI offers the Financial Modeling & Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI's Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! 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:

• Capital Gains YieldCapital Gains YieldCapital gains yield (CGY) is the price appreciation on an investment or a security expressed as a percentage. Because the calculation of Capital Gain Yield involves the market price of a security over time, it can be used to analyze the fluctuation in the market price of a security. See calculation and example
• Dividend vs Share Buyback/RepurchaseDividend vs Share Buyback/RepurchaseShareholders invest in publicly traded companies for capital appreciation and income. There are two main ways in which a company returns profits to its shareholders – Cash Dividends and Share Buybacks. The reasons behind the strategic decision on dividend vs share buyback differ from company to company
• Important Dividend DatesImportant Dividend DatesIn order to understand dividend-paying stocks, knowledge of important dividend dates is crucial. A dividend typically comes in the form of a cash distribution that is paid from the company's earnings to investors.
• Return on Equity (ROE)Return on Equity (ROE)Return on Equity (ROE) is a measure of a company’s profitability that takes a company’s annual return (net income) divided by the value of its total shareholders' equity (i.e. 12%). ROE combines the income statement and the balance sheet as the net income or profit is compared to the shareholders’ equity.