While European companies prefer dividends (to the tune of 70%) as the biggest form of shareholder returns, US companies prefer share buybacks (58%).

While the dividend yield on US stocks is almost half that on European stocks, the shareholder yield (which includes buybacks) is identical.

Since 2000, the amount of dividends paid per share has grown by 5.6% annually across the world.

Thanks to the effects of US tax reform, share buybacks and dividends should increase sharply in the US.

In 2018 and 2019, they are forecast to grow by 7% annually.

Do Companies cut their dividends?

Dividend cuts are fairly rare, except during the crisis of 2008. Outside the crisis of 2008, the number of companies raising their dividends has easily surpassed the number cutting them. However, even though they are statistically rare, dividend cuts have been far more common in Europe than in the US since 2000.

When the shareholder return falls significantly, the markets generally punish the stock severely. The sustainability of shareholder returns should therefore be an important stock picking criterion for yield stocks.

Extreme Buyback programs are a big source of risk

Some companies have extreme and unsustainable share buyback policies. Value destruction accentuated by large share buybacks when the share price falls.

Frequently a double blow: massive value destruction coupled with a fall in the share price.

Very high buybacks: volatile performance, with frequent periods of underperformance.

What is a value trap?

A value trap is a stock that appears to be cheap because the stock has been trading at low multiples of earnings, cash flow or book value for an extended time period. Value traps attract investors who are looking for a bargain because these stocks are inexpensive. The trap springs when investors buy into the company at low prices and the stock never improves. Trading that occurs at low multiples of earnings, cash flow or book value for long periods of time might indicate that the company or the entire sector is in trouble, and that stock prices may not move higher.

Value creation is even greater when stocks are discounted

When stock can be bought below a business's value it is probably the best use of cash. Anytime you can buy stock for less than it's worth, it's advantageous to the continuing shareholders.

Warren Buffett launched buybacks when Berkshire Hathaway’s share price was < 1.1x book value, subsequently raised to <1.2x. This intrinsic value is the most difficult point for this “sage” to assess and depends on the company and sector.

Financial theory supports this approach: the Earnings Per Share enhancing effect is even greater when the company is a value stock.

Quoting Warren Buffett, ‘Can you imagine somebody going out and saying, we're going to buy a business and we don't care what the price is? You know, we're going to spend $5 billion this year buying a business, we don't care what the price is. But that's what companies do when they don't attach some kind of a metric to what they're doing on their buybacks’.

Dividend growth or yield?

We have seen an outperformance of high yield stocks (MSCI Europe HY) from 2002 to May 2007. However from June 2007 to date, we have seen an outperformance of growing dividend stocks.

No dominant theme in terms of alpha generation. Past performance shows a strong rotation between styles in dividend-related alpha generation, and more broadly limited alpha at best vs. traditional indices (Stoxx 600).

Capital gains vs Dividends

The contribution of dividends is cyclical but high over the long term, with a contribution of more than 30% of the total return performance of European equities.

“Sustainable” dividend growth is the most important driver of alpha.


When a Company has a buyback program, it should be sustainable and avoid having buyback programs, which can result in a value trap. The Company should also focus on buying back its stock at discount to its intrinsic value.

On the other hand, when a Company pays a dividend, the dividends should be sustainable and increased over time.

When picking stocks, exclude companies with excessive risk factors and select companies with ‘sustainable growth’ and ‘value creation’ profiles.

Cash returns to shareholders is a major theme and a key source of alpha in portfolios. Specific cultural differences exist in the US (Buybacks) and Europe (Dividends), but similar stock-picking approaches apply centred on the sustainability of growth in cash returns to shareholders.