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Dividend growth investing and share buybacks: Amcor (ASX:AMC)

Share buybacks are an often-overlooked tool in the capital allocation toolbox of management.  However, it is one of the three key pillars of cash flow management and can be even more rewarding for shareholders than dividends.

What are share buybacks?

I recently wrote an article about long term value creation that highlighted three mechanisms in which management can generate returns for shareholders outside of growth:

  • Dividends
  • Share buybacks, and
  • Debt management
Source: Boston Consulting Group (TSR = Total Shareholder Return)

Rask Education has an easy-to-use overview on share buybacks as a form of ‘capital management’. In essence, if a company has surplus capital, it can elect to return this to shareholders through a buy-back.

How do share buybacks impact your returns?

As there are fewer shares on issue, buy-backs can boost metrics such as earnings per share (EPS), which is calculated by dividing profit by the numbers of shares on issue. All things being equal, a higher EPS will lower a company’s price-earnings ratio.

Returning back to the Chowder Number, to include share buybacks one should consider it as: Dividend Yield plus Percentage of Shares Bought Back plus Consensus EPS Growth.

So if a company has a 4% Dividend Yield, 1% Share Buybacks, and 7% EPS growth, that’s a total return of 12% for the investor.

Few Aussie companies do share buybacks

Unfortunately, in Australia, few companies do share buybacks. Sure, recently the banks announced multi-billion buybacks, though since the GFC they have been a net issuer of shares.  Other notable exceptions include CSL (ASX: CSL), Boral (ASX: BLD) and Telstra (ASX: TLS).

There are perhaps two major impediments to buybacks.  First, quality companies that generate significant free cash flow tend to trade at high valuations, reducing the returns on share buybacks.  Second, the tax imputation system and franked dividends provide better returns to shareholders, particularly for retirees with low marginal tax rates.

Meanwhile, in the US, 2021 is expected to set a new record for share buybacks with over US$1.1trn already announced.  While over in Japan, Softbank (TYO: 9984 or OTCMKTS: SFTBY) shares rocketed over 10% on the announcement of a new US$9bn share buyback.

Source: Bloomberg

Amcor – a Dividend Aristocrat

Amcor (ASX: AMC or NYSE: AMCR) recently acquired Bemis, and with that has become a Dividend Aristocrat.  A Dividend Aristocrat has increased dividends every year for more than 25 years straight – that requires a helluva good business to achieve.

There are only 65 Dividend Aristocrats in the S&P 500 (where most of them are), and Amcor has the 10th highest dividend yield at 3.85% and has increased it for 38 years consecutively.

Let that sink in.

AMC share price

Source: Rask Media AMC 10-year share price chart

Amcor has achieved a 15% total shareholder return from 2010-21. This has been achieved through the pillars of organic growth, growth CAPEX (particularly acquisitions), dividends and buybacks.  Buybacks are being used from the free cash flow to offset the issuing of shares to partially fund the acquisitions.

Looking forward, management has set a lofty ambition of 10-15% CAGR. This will require ~4% dividend yield and ~2% buybacks on top of analysts forecast of ~8% EPS growth over the next five years.  If they achieve this, not only will they be a Dividend Aristocrat, but they’ll become the ASX Share Buyback King.

Source: Amcor Investor Relations, Investor Presentation.

Final thoughts

It’s difficult for an investor to get a good grasp on share buybacks.  Rarely do they get much attention.  Share buybacks can turbocharge your returns, and conversely share based compensation and issuance can do the exact opposite.

For more on Dividend Growth Investing, see my recent article that outlines the screener approach being used here.

Source: TIKR, Author’s Calculations.

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Are you stuck wondering where to invest right now? Have you got cash 'sitting on the sidelines'? Are you looking for dividend income AND growth but don't know where to start? Rask's expert ASX analyst team has just released a full report, detailing where we'd invest $10,000 right now.

Not only are we offering these 11 investment ideas completely FREE, we've also released an in-depth podcast to go with the report!

So, whether you have $2,000 or $50,000, our brand new analyst report could help transform your watchlist. Right now, you can get the full analyst report emailed to you for FREE by CLICKING HERE NOW.

At the time of publishing, the author owns shares of Amcor and Softbank.

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