Dividends Aren't Enough: Drug Companieshttp://www.fool.com/investing/dividends-income/2010/09/08/dividends-arent-enough-drug-companies.aspx Jeremy Myers
September 8, 2010
I love cash. As an investor, nothing makes me happier than a company that returns money to shareholders, rather than spending it recklessly on a CEO's pet projects or an ill-fated acquisition. Historically, investors have often looked at a stock's dividend yield to identify these shareholder-friendly enterprises. But I prefer a slightly different metric -- one proven to further maximize investor returns.
A 2007 study in The Journal of Finance suggests that investors should also factor net share repurchases into the equation, through a metric called the net payout ratio. According to the authors of the study, this ratio not only identifies companies that are paying back investors, but also predicts future equity returns better than the dividend yield.
Let's crunch the numbers
The ratio that you end up with represents the percent of each invested dollar that a company is returning to shareholders. This simple calculation handily allows us to adjust for shares issued through employee stock options and other forms of shareholder dilution. Some companies will spend a lot of money buying back shares just to counteract the dilutive effect of their stock compensation programs, without creating any value for shareholders.
Here are the net payout yields for a few companies in the pharmaceutical industry: