Shareholder yield is defined as how much cash a company returns to investors via buybacks, cash dividends, and reduction of debt. On that basis, it’s not surprising that Warren Buffett embraces shareholder yield as an avenue for identifying strong-long term investments.
Thanks to exchange traded funds such as the WisdomTree U.S. Value Fund (WTV ), investors can deploy a Buffett-backed strategy without the need to select individual stocks. Proving there’s validity in the shareholder yield strategy in ETF form, the actively managed WTV is up 25.58% year-to-date, an advantage of about 140 basis points over the S&P 500.
While WTV has impressed this year, investors don’t need to fret about having missed out on potential upside. After all, shareholder yield works over the long-term, which likely explains why it’s central to Buffett’s investing style. The long-term durability of shareholder yield could also indicate opportunity with WTV is available with 2025 right around the corner.
WTV As Better Value Bet
For decades, value investing largely focused on traditional metrics, such as price-to-earnings and price-to-sales, among others. Fortunately, this investing style has evolved with the times to encompass the elements of shareholder yield. As WisdomTree’s Brian Manby noted, share repurchases have been frequently used by Buffett to signal that he sees value in shares of Berkshire Hathaway (NYSE: BRK-A).
“Buybacks have become a mutually beneficial mechanism for delivering value for corporations and shareholders alike. They allow businesses to improve their financials and provide value to stockholders while simultaneously avoiding costly dividend payments,” wrote Manby.
One can make a case that buybacks, dividends, and debt reduction are linked. Companies burdened by too much debt or not generating enough cash flow to pare those liabilities are limited in their capacity to repurchase their shares or pay and grow dividends.
Focusing on dividends, Berkshire Hathaway’s equity portfolio is chock full of dividend payers. Many of them have payout increase streaks that can be measured in decades. It’s not surprising that a fair number of WTV holdings are also held by Berkshire Hathaway. The good news is investors don’t have to pay up to access the ETF’s benefits.
“WTV currently trades at less than 14x forward earnings, shown in figure 7, which is only about a half-point above its median since inception. That corresponds to a 7.4% earnings yield, more than 3% higher than that of the S&P 500,” added Manby.
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