The Best of Both Worlds: Buyback Leaders with Hefty, Growing Dividends

Anthony Haddad's picture

Thursday, October 1, 2009 - 9:56am

by Anthony Haddad

If anyone ever tells you that you must choose between dividends and capital gains, it's now safe to laugh.

A full 135 companies have increased their dividends AND decreased their shares outstanding through buybacks in each of the past five years.

Stock buybacks and dividends are the two major ways companies return wealth to shareholders. It's easy to see how dividends work; the company makes money and passes some of it off to shareholders.

Stock buybacks are a little trickier.

By buying its own shares, a company reduces the number of shares outstanding, which increases the value of individual shares. The result is that each shareholder's stake in the company grows.

If you owned 1,000 shares of a company with 100,000 shares outstanding, for example, you'd have a 1% stake in the company. If that company bought back 10,000 shares, you'd now own about 1.1% of the company. Theoretically, the value of your shares would increase by a similar percentage.

I screened for companies that have decreased their total shares outstanding every year during the past five years. Then I added the requirement that these companies must have also increased their total annual dividends each year during the past five years. The result was 135 companies.

To refine our selection universe further, I looked for companies with positive free cash flow during the past three years. "Free cash flow" is operating cash flow less what the company allocates to capital expenditures. A positive number here is a good sign because it shows the company can generate cash -- which is what dividends are paid with.

I also removed companies that had a market capitalization of less than a billion dollars.

The final criterion was a yield above 6%.

Here are the two winners:

Company (Ticker) Yield 5-Year Dividend Growth 5-Year Total Return 10-Year Total Return
BP PLC (NYSE: BP) 6.3% +15.6% +19.4% +34.6%
Portugal Telecom (NYSE: PT) 7.1% +20.7% +64.5% +122.9%
Anthony Haddad does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.