How to Find Companies That Return Cash in a Tough Market

In spite of the possibility of a volatile stock market, companies returning large sums of cash to shareholders can increase the returns seen by investors during these turbulent times. 

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It seems that in the wake of the current banking problems, the economy is on the verge of slowing down, as bank lending decreases.

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The return on investment that these companies are providing to investors makes owning shares in these companies very attractive. A cash-returning company is an excellent investment for investors who do not wish to be highly sensitive to the ups and downs of the stock market, as the price of many stocks whipsaw up and down. When a stock is acquired at a certain price, you have the option of receiving dividends in return for that price. In addition, share buybacks sometimes result in fewer shares outstanding, resulting in an increase in earnings per share, which is a positive for stock prices, even if they still fluctuate from time to time. If the company pays dividends on a regular basis, as well as how prices move on a regular basis, the total return could be solid. 

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By examining the total cash-return yield, one can get a better sense of how attractive a stock is in terms of its potential for cash returns. Essentially, this is a percentage of the market capitalization of a company divided by the dividend payment plus the number of buyback dollars made by the company. When the yield on the stock is much higher than what is yielded by the safe 10-year Treasury bond of about 3.5%, then you may want to take a chance on purchasing that stock. 

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Investors can eliminate those yields from their portfolios by weeding out those sectors with unattractive yields. There has already been a bid-up in consumer staples as well as utilities due to the fact that those sectors tend to hold up very well when the economy is having a difficult time. This means the dividends plus buyback dollars in these sectors do not yield much relative to their market caps. It has been reported by 22V Research that these yields are substantially lower than those of the 10-year bond. 

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In some sectors, yields are perceived to be higher than they are in fact. S&P 500 energy stocks have a 10% aggregate total cash return yield at the moment, which is not really surprising since the industry is highly cyclical and sales earnings rise and fall rapidly according to the economy. The economy could deteriorate, which would lead to lower energy prices and a reduction in earnings; companies would be forced to return less cash to shareholders. 

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The good news is that some sectors offer yields equal to or better than those of government bonds while posing fewer risks.  

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A good example of this is the S&P 500 media sector. Large, mature, cash-returning companies that trade cheaply are often among them. In other words, their cash flows are relatively high in relation to their market capitalizations. Approximately 10% of the S&P 500's aggregate market capitalization should be devoted to cash returns in the media sector this year. The yield on the 10-year note is over six percentage points higher. 

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Comcast (CMCSA) is one example. By the end of the most recent quarter, it had purchased approximately $14 billion of its own shares. A total of $18.89 billion will be returned to shareholders through dividends, for a total of $4.89 billion in returns. It represents about 12% of the company's relatively large market capitalization.  

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Similarly, the insurance business offers juicy yields. The insurers in the S&P 500 are similar to media companies in that they are large, and mature, and they trade at bargain prices. In this year's cash return forecast, total returns are still well above the 10-year yield at just over 6%. 

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In this regard, Prudential Financial (PRU) would be a good example. The company is on track to repurchase about $15 billion in stock each year while paying out about $1.8 billion in dividends per year as of its most recent quarter. With a market capitalization of just under $30 billion, its total cash return is approximately 11%. 

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Do not run for cash just because you need it. Stocks with cash returns are in high demand.