{"id":16298,"date":"2023-05-31T13:44:50","date_gmt":"2023-05-31T17:44:50","guid":{"rendered":"https:\/\/ifintechworld.com\/investing\/this-secret-600-billion-payout-will-send-our-dividends-soaring\/"},"modified":"2023-05-31T13:44:51","modified_gmt":"2023-05-31T17:44:51","slug":"this-secret-600-billion-payout-will-send-our-dividends-soaring","status":"publish","type":"post","link":"https:\/\/ifintechworld.com\/?p=16298","title":{"rendered":"This ‘Secret’ $600-Billion Payout Will Send Our Dividends Soaring"},"content":{"rendered":"
\n

There\u2019s a $600-billion river of cash flowing straight out of<\/em> Corporate America\u2014and straight into<\/em> some dividend investors\u2019 pockets. Today we\u2019re going to grab our share.<\/p>\n

Companies don\u2019t make much of the cash outlays we\u2019re going to talk about. You might catch a line or two about them in an earnings release, but that\u2019s it. That\u2019s because they\u2019re trying to stay below the radar of the Biden Administration, which is starting to tax these payouts, and has even threatened to quadruple<\/em> the slice they\u2019re taking now.<\/p>\n

As for us, we\u2019re not really focused on these cash payouts themselves (though we\u2019ll happily take our share!). We\u2019re keen on how they combine with our growing dividends<\/em> to form a \u201cDividend-Buyback Feedback Loop\u201d that can double, or more, the share prices on our favorite stocks.<\/p>\n

A $600-Billion \u201cCash River\u201d to Float Our Dividends<\/h2>\n

All right, I\u2019ll come clean: these payouts aren\u2019t really secret at all. I\u2019m talking about share buybacks, $600 billion of which have been announced by Russell 3000 companies (or the 3,000 biggest US public companies) so far this year. That\u2019s near a record, according to the folks at Birinyi Associates.<\/p>\n

I didn\u2019t use the word \u201cbuybacks\u201d off the top because people\u2019s eyes usually glaze over when I do. But we contrarian dividend investors know better<\/em> than to ignore buybacks. Because when you find a company with a smartly run buyback plan and<\/em> a growing dividend, you\u2019re almost sure to find a growing share price,<\/em> too.<\/p>\n

<\/fbs-ad><\/p>\n

It\u2019s the most powerful investment strategy I know. Look at the chart below for drug distributor AmerisourceBergen
\n
\n ABC
\n <\/fbs-ticker> (ABC), <\/strong>which was a holding of my Hidden Yields<\/em> dividend-growth advisory from June 2020 to December 2022, generating a 69% return in that time.<\/p>\n

But go back a decade and you see something intriguing: as ABC\u2019s dividend rose 131%, its share price trotted higher with it. But take a look at the orange line at the bottom\u2014that\u2019s the reduction in ABC\u2019s share count due to buybacks:<\/p>\n

You can clearly see that as those buybacks accelerated, the share price was \u201cjuiced\u201d higher than ABC\u2019s payout growth. I\u2019ve seen that again and again in dividend stocks. Like with former Hidden Yields<\/em> holding Texas Instruments
\n
\n TXN
\n <\/fbs-ticker> (TXN),<\/strong> which we rode to a stout 148% return in just under five years:<\/p>\n

Our \u201cdividend-buyback feedback loop,\u201d then, rolls like this:<\/p>\n

    \n
  1. Management raises the dividend,<\/strong> driving up the current yield on the stock.<\/li>\n
  2. Investors see that raise and bid the price up<\/strong> (and the yield back down). The excitement over the higher payout then fades.<\/li>\n
  3. But then management sweetens the pot by repurchasing their own stock.<\/strong> The resulting extra demand boosts the share price further.<\/li>\n<\/ol>\n

    There\u2019s more, too, because buybacks cut the number of shares on which the company has to pay dividends, boosting future per-share payouts!<\/p>\n

    That\u2019s where then real action is\u2014getting in on one of these feedback loops and hanging on as buybacks, dividends and share prices feed off each other over and over again.<\/em><\/p>\n

    The good news is there are plenty of companies doing this. Many are among those that have announced that $600 billion in buybacks I mentioned earlier.<\/p>\n

    Throw in another year of dividend growth (the latest estimate is for 5% payout increases this year across the S&P 500), and you tilt the odds sharply in your favor, no matter what happens with the debt ceiling, the banking crisis, inflation or whatever other \u201cwall of worry\u201d the market is climbing on any given day.<\/p>\n

    But even so, I do have a caveat: we only<\/em> want to target companies buying back shares the right<\/em> way\u2014that is, when the stock is cheap. Otherwise they\u2019re just burning cash.<\/p>\n

    With that in mind, let\u2019s zero in on a stock with a management team of \u201cbuyback jedis\u201d the likes of which I\u2019ve rarely seen. This one is also a habitual dividend grower whose shares are cheap,<\/em> making them attractive to management\u2014and to us!<\/p>\n

    CMI\u2019s Classic Dividend-Buyback Feedback Loop<\/h2>\n

    Engine maker Cummins
    \n
    \n CMI
    \n <\/fbs-ticker> Inc. (CMI)<\/strong> isn\u2019t a stock most dividend investors think of often, because its industry can be volatile, as truck demand swings with the economy.<\/p>\n

    But we should<\/em> be keeping Cummins high on our list, for many reasons: for one, it \u201cstarts us off\u201d with a 3% yield, much higher than the typical S&P 500 name. Thanks to that and its 38% dividend growth in the last five years, you\u2019d already be yielding 4.6% today if you\u2019d bought back then.<\/p>\n

    That payout growth, on its own, has pulled the share price higher.<\/p>\n

    The firm has been posting solid sales growth in the last five years and saw sales rise 8% in the first quarter, as truck demand jumped in North America and the Chinese construction market improved. Cummins also recently boosted its sales outlook for the year, to 15% to 20% growth over last year from 12% to 17%.<\/p>\n

    So it\u2019s got plenty of growth to keep that dividend rising. Now let\u2019s talk buybacks, because there\u2019s a pattern here that is, frankly, stunning.<\/p>\n

    Above we\u2019ve got a chart of CMI\u2019s number of shares outstanding (orange line) laid over the P\/E ratio (purple). As you can see, the orange line gets steeper (meaning CMI is buying back more shares) when the ratio falls and levels off when the P\/E moves up.<\/p>\n

    That\u2019s a clear sign of a management team that knows<\/em> how to bargain-hunt its shares, and they\u2019ve got another opportunity now, with CMI boasting a P\/E of just 11.9. That\u2019s what I call a \u201cshoe size\u201d P\/E, and they\u2019re not very common these days, even with the market still off its highs after last year\u2019s dumpster fire.<\/p>\n

    Finally, Cummins\u2019 strong balance sheet gives it a buffer in case of recession, with $2.4 billion of cash and long-term debt of $7.75 billion, for net debt of $5.3 billion.<\/p>\n

    That\u2019s a small fraction of its market cap (or value as a public company) of $30 billion\u2014and yet another reason why CMI\u2014and its expertly run Dividend-Buyback Feedback Loop\u2014is worth our attention now.<\/p>\n

    Brett Owens is chief investment strategist for <\/em>Contrarian Outlook<\/em>. For more great income ideas, get your free copy his latest special report: <\/em>Your Early Retirement Portfolio: Huge Dividends\u2014Every Month\u2014Forever.<\/p>\n

    Disclosure: none<\/em><\/p>\n<\/div>\n

    Read the full article here<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

    There\u2019s a $600-billion river of cash flowing straight out of Corporate America\u2014and straight into some dividend investors\u2019 pockets. Today we\u2019re going to grab our share. Companies don\u2019t make much of the cash outlays we\u2019re going to talk about. You might catch a line or two about them in an earnings release, but that\u2019s it. That\u2019s […]<\/p>\n","protected":false},"author":1,"featured_media":16299,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[239],"tags":[83],"class_list":["post-16298","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-featured"],"yoast_head":"\nThis 'Secret' $600-Billion Payout Will Send Our Dividends Soaring | iFintechWorld<\/title>\n<meta name=\"description\" content=\"There\u2019s a $600-billion river of cash flowing straight out of Corporate America\u2014and straight into some dividend investors\u2019 pockets. 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