Cambria Fund Profile: Shareholder Yield Suite

Meb Faber (0:05)

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SPEAKER_2 (0:18)

Meb Faber is the co-founder and Chief Investment Officer at Cambria Investment Management. For more information, visit cambriainvestments.com.

Meb Faber (0:27)

Howdy, friends. Today's a special episode. I'm going to talk about one of my oldest and favorite approaches to the market, shareholder yield and the Cambria funds we engineered around it. Let's jump right in.

Let me start with a simple question. What do you get when you own a stock? The component most investors look to first is the dividend. And fair enough, reinvested dividends have historically made up roughly half of US stocks long term returns, going all the way back to the 1870s. But the dividend is only one piece of total return. As I record this, the S&P 500's dividend yield is sitting around 1%, the lowest reading for US stocks in history. You might treat that as a sign, stocks are handing investors less than ever. But that number only counts dividends. Stopping there is like the old parable of the blind man and the elephant. Each one grabs a different part and misses the whole animal. Now, there's a structural reason behind why that matters more today than it used to. Companies now pay out a smaller share of earnings as cash dividends than they once did. Around 40% down from roughly 60% a century ago.

Something that accelerated this was the SEC's rule 10B18 in 1982, which gave firms a safer harbor from manipulation charges when repurchasing their own shares.

Once share repurchases or buybacks got easier, they climbed from almost nothing to equaling or surpassing dividends by the late 1990s. And here's the key piece of data. The total cash companies returned as the share profits has stayed relatively steady. It's the mix that shifted.

And the scale today is enormous. According to S&P Global, for S&P 500 companies, buybacks crossed a trillion over the 12 months through September 25, paired with about $660 billion in dividends. Roughly $0.60 of every dollar returned to shareholders was through buybacks. So, focusing on dividends alone means you missed most of the story.

Capturing the entire picture is the idea behind shareholder yield. Instead of asking how much a company pays in dividends, ask how much it returns to shareholders overall, dividends and buybacks combined. It's a more complete answer to a simple question, how much cash is the company actually returning to me?

For anyone less familiar, share repurchase or buyback returns profits much like a dividend, but for a taxable investor, it doesn't trigger the same taxable event. The value is just subtler, reflected in the share price rather than landing in your brokerage account. At the end of the day, wouldn't you rather have the highest total return, whatever form it takes?

The holistic view of shareholder yield offers a valuable shift in perspective. Picture two companies paying the exact same dividend and traded the exact same price. One is also steadily buying back its shares and the other isn't. The one buying back shares is actually returning more cash to shareholders, despite both companies offering identical dividend yields. That's the blind spot. Buy backs are a real slice of total return and shareholder yield is simply the lens that lets you see the whole rather than a single piece. There's one catch though, and it's about price. Warren Buffett said it best in his 1984 letter to Berkshire Hathaway shareholders, when companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.

The key phrase for buybacks here is intrinsic value. If you're an overconfident CEO buying back overvalued shares, then you're destroying value. In such a case, an objection to include buybacks would be valid. Buybacks would indeed be a detriment to total return in that case. But when a wise CEO buys back shares at great valuations or below intrinsic value, to paraphrase Buffett's quotes, no alternative action benefits shareholders, surely as repurchases.

The objective isn't simply to find companies returning a lot of cash. It's finding the ones doing that while also trading at reasonable or downright cheap valuations, ideally with quality balance sheets so they can return cash sustainably. Here at Cambria, we put that process to work across five ETFs spanning US, foreign developed and emerging market stocks. While each addresses a different slice in the market, they're engineered the same way. So let's walk through a summary of how the process works in practice.