The term shareholder yield captures the three ways in which the management of a public company can distribute cash to shareholders: cash dividends,

stock repurchase Share repurchase, also known as share buyback or stock buyback, is the reacquisition by a company of its own shares. It represents an alternate and more flexible way (relative to dividends) of returning money to shareholders. Repurchases allow s ...

s and debt reduction.

Overview

Dividends A dividend is a distribution of profits by a corporation to its shareholders, after which the stock exchange decreases the price of the stock by the dividend to remove volatility. The market has no control over the stock price on open on the ex ...

are the most obvious form of distributing cash.

Stock repurchase Share repurchase, also known as share buyback or stock buyback, is the reacquisition by a company of its own shares. It represents an alternate and more flexible way (relative to dividends) of returning money to shareholders. Repurchases allow s ...

s also increase

shareholder value Shareholder value is a business term, sometimes phrased as shareholder value maximization. The term expresses the idea that the primary goal for a business is to increase the wealth of its shareholders (owners) by paying dividends and/or causing th ...

provided that the shares purchased are cancelled or held in treasury but not used as a device to make up for dilution from option issuances to management and others. Reducing debt can also produce a de facto dividend; assuming the value of the firm remains the same, shareholder value is increased as debt is reduced. To understand how debt reduction increases

, it is helpful to consider the 1958 paper by Nobel laureates

Franco Modigliani Franco Modigliani (; ; 18 June 1918 – 25 September 2003) was an Italian-American economist and the recipient of the 1985 Nobel Memorial Prize in Economics. He was a professor at University of Illinois at Urbana–Champaign, Carnegie Mellon Uni ...

and

Merton H. Miller Merton Howard Miller (May 16, 1923 – June 3, 2000) was an American economist, and the co-author of the Modigliani–Miller theorem (1958), which proposed the irrelevance of debt-equity structure. He shared the Nobel Memorial Prize in Economic ...

entitled ''The Cost of Capital, Corporation Finance and the Theory of Investment''. This paper proved that a firm’s value is independent of how it is financed, provided that one ignores the tax effect of debt interest. If Modigliani and

Miller A miller is a person who operates a mill, a machine to grind a grain (for example corn or wheat) to make flour. Milling is among the oldest of human occupations. "Miller", "Milne" and other variants are common surnames, as are their equivalents ...

are correct, the use of

free cash flow In financial accounting, free cash flow (FCF) or free cash flow to firm (FCFF) is the amount by which a business's operating cash flow exceeds its working capital needs and expenditures on fixed assets (known as capital expenditures). It is that p ...

to repay debt results in a transfer of wealth from the debtor to the shareholder. Over a decade ago Meb Faber tackled this topic in his book Shareholder Yield: A Better Approach to Dividend Investing. The thesis of the Shareholder Yield book is that a more holistic approach, incorporating both cash dividends and net stock buybacks, is a superior way to sort and own stocks. It is important to include share issuance in the net stock buybacks equation as many companies consistently dilute their shareholders with share issuance often due to stock based compensation.

History of term

The term shareholder yield was coined by William W. Priest of Epoch Investment Partners in a paper in 2005 entitled ''The Case for Shareholder Yield as a Dominant Driver of Future Equity Returns'' as a way to look more holistically at how companies allocate and distribute cash rather than considering dividends in isolation. This concept was further detailed in the 2007 book, ''Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor'', by William W. Priest and Lindsay H. McClelland.William W. Priest and Lindsay H. McClelland (2007) ''Free Cash Flow and Shareholder Yield: New Priorities for the Global Investor'', Hoboken, NJ: John Wiley & Sons.

References

{{Reflist Stock market Yield