What are stock buybacks and why do they matter?

Stock buybacks happen when a company uses its cash to purchase its own shares from the market, reducing the total number of shares available. This typically increases the value of remaining shares and shows management's confidence in the company's future. When a company like Schwab announces a $20 billion buyback, it's a strong signal they believe their stock is undervalued.

What is shareholder yield and how is it different from dividend yield?

Shareholder yield combines both dividends and share buybacks to show the total cash being returned to investors. While dividend yield only measures cash dividends paid out, shareholder yield gives a complete picture of how much capital a company is returning through all methods. This makes it a more comprehensive measure of shareholder-friendly companies.

Why do companies choose buybacks over increasing dividends?

Buybacks offer more flexibility than dividends because they can be adjusted or stopped without disappointing investors who expect regular dividend payments. They also provide tax advantages for shareholders and can boost earnings per share by reducing the share count. Companies often use buybacks when they have excess cash but want to maintain dividend stability.

What does it mean when a company has strong cash flows?

Strong cash flows mean a company consistently generates more cash from its operations than it spends on running the business. This excess cash can be used for growth investments, debt reduction, or returning money to shareholders through dividends and buybacks. Companies with strong cash flows are generally more stable and better positioned to reward investors.

How do ETFs fit into a shareholder yield strategy?

ETFs like the Schwab funds in this group provide instant diversification across many companies that focus on returning capital to shareholders. Instead of picking individual stocks, you can invest in a basket of dividend-paying or buyback-focused companies through a single ETF, reducing risk while still capturing the shareholder yield theme.

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Capital Returns: The Shareholder Yield Play

Following Charles Schwab's massive $20 billion stock buyback and dividend increase, this theme focuses on other financially robust companies that are similarly rewarding their investors. The strategy is to invest in firms with strong cash flows and a commitment to returning capital to shareholders.

Han Tan | Market Analyst

Updated 2 days ago | Published at juillet 25