Buybacks, Dividends and Free Cash Flows

In a recent post ( FT Alphaville discussed buybacks.

With 2020 in sight and the U.S. Presidential Campaign, we will read more and more similar headlines. If you add debates around how real wages have increased (or not) over the last 10 years or the different social widening gaps, you can be certain that you will be reading a lot about share buybacks in the next 12 months.

I would like to start with a 10 years picture of S&P 500 Buybacks:

Looking at the chart above, it is fair to say that there has been an acceleration of share buybacks in the U.S. over the last couple of years.

With earnings yield above the after-tax cost of debt, companies have a huge incentive of using buyback. Looking at earnings growth for the S&P 500 in 2020, which stands at the moment around 11-12%, we should assume that 1/2 of it comes from buybacks.

For example, below is the Top 20 U.S. share buybacks in $m (source: S&P IQ):


Apple $18,154
Bank of America $6,507
Oracle $6,301
JPMorgan $5,210
Cisco Systems $4,936
Wells Fargo $4,906
Microsoft $4,633
Johnson Controls International $4,125
Alphabet $3,577
Citigroup $3,464
Intel $3,049
Booking Holdings $2,718
Johnson & Johnson $2,486
Amgen $2,415
Biogen $2,402
Visa $2,152
Lowe’s Companies $1,944
Mastercard $1,921
Honeywell International $1,900
Facebook $1,752

Apple, thanks to his Cash Flow generation and Cash pile, is sitting at the top. No surprise here.

But could all those companies afford a share buyback and did we experienced a recent acceleration in share buybacks?

On the second question, we should be looking at the two ways of rewarding shareholders (I am not talking about stock price going up here): dividends and buybacks. To get a fair picture, we have to combine those two and analyze recent trends.

Below 10 years of Dividend Yield and Buyback Yield for the S&P 500:

  Dividend Yield Buyback Yield Dividend and Buyback Yield
2009 2.0% 1.4% 3.4%
2010 1.8% 2.6% 4.4%
2011 2.1% 3.6% 5.7%
2012 2.2% 3.1% 5.3%
2013 1.9% 2.9% 4.8%
2014 1.9% 3.0% 5.0%
2015 2.1% 3.2% 5.3%
2016 2.1% 2.8% 4.8%
2017 1.8% 2.3% 4.1%
2018 2.2% 3.8% 6.0%

I see two things here: at 6%, 2018 was the highest year in terms of shareholders reward. 2018 was not very far from levels seen in 2011 though, ie two years after the Great Financial Crisis.

After looking at this big picture, I would like to cover more fundamental analysis.

When we are analyzing a company, we should know both its dividend yield and whether it has an active share buyback. As always when we look at quantitative analysis, we should be looking at past trends, recent trends and expectations. For example, when covering a company that is helpful to analyze the last 5-10 years and what the market’s expectations for the next 2-3 years.

Share buyback programs have specifics and we should be analyzing them before entering a position: the total amount, the time frame (when is it expiring), the minimum purchase price, the maximum purchase price, the maximum daily volume allowed…

But as underlined before, when looking at dividends and buybacks, we want to know if a company has the means to reward its shareholders with such dividend yield and share buyback program. If they can afford doing so.

That is where we should be looking (but not only) at Free Cash Flow = FCF.

FCF represents the cash generated after cash outflows to support operations and maintains its capital assets. When studying a company’s FCF, we should be able to identify how the company could finance its growth, pay its dividends, buyback shares or reduce its debts.

Let’s start with a game by trying to identify dividends/buybacks/FCFs for the five companies below: Apple, Walmart, Amazon, McDonald’s and Microsoft. Try to guess which data belongs to each company:

 Company A 2014 2015 2016 2017 2018
Dividends (3.22B) (3.23B) (3.06B) (3.09B) (3.26B)
Share Buyback (2.96B) (5.78B) (10.87B) (4.23B) (4.8B)
Free Cash Flow 4.15B 4.73B 4.24B 3.7B 4.23B
FCF – (Div. + Buyback) -2.03 -4.28 -9.69 -3.62 -3.83

 Company B 2014 2015 2016 2017 2018
Dividends (11.13B) (11.56B) (12.15B) (12.77B) (13.71B)
Share Buyback (45B) (35.25B) (29.72B) (32.9B) (72.74B)
Free Cash Flow 50.14B 70.02B 53.09B 51.15B 64.12B
FCF – (Div. + Buyback) -5.99 23.21 11.22 5.48 -22.35

 Company C 2014 2015 2016 2017 2018
Share Buyback          
Free Cash Flow 1.95B 7.33B 9.71B 6.41B 17.3B
FCF – (Div. + Buyback) 1.95 7.33 9.71 6.41 17.3

 Company D 2014 2015 2016 2017 2018
Dividends (6.19B) (6.29B) (6.22B) (6.12B) (6.1B)
Share Buyback (1.02B) (4.11B) (8.3B) (8.3B) (7.41B)
Free Cash Flow 16.39B 15.91B 20.91B 18.29B 17.41B
FCF – (Div. + Buyback) 9.18 5.51 9.71 3.87 3.9

 Company E 2014 2015 2016 2017 2018
Dividends (13.81B) (9.88B) (11.01B) (11.85B) (12.7B)
Share Buyback (18.4B) (13.81B) (15.3B) (11.02B) (9.72B)
Free Cash Flow 38.26B 23.72B 24.98B 31.38B 32.25B
FCF – (Div. + Buyback) 6.05 0.03 -1.33 8.51 9.83

To get the answers, you will have to watch this short video which comes from the Video 18 of the 4x4 Video Series – :




After watching this, you probably understand that behind the topic of share buyback lie more important issues:

How is the company generating FCF? What is the FCF trend? What FCF generation should I expect from that company based on its product cycle and the sector drivers? What are the market’s expectations? Can the company afford (or not) such a dividend and/or buyback? Are dividends and buybacks financed by FCF generation or with debt? Is the company under leveraged or using too much debt?…

In your investment process, you want to be able to generate ideas with different filtering, different criteria. Analyzing Free Cash Flows is a great booster to understand how a company is doing.

On the topic of FCF vs (share buyback and dividends), you could be looking at how the Free Cash Flows have been trending over the previous years and what are the growth expectations. Then you could compare on how over time a company is able to generate FCF and cover its dividends and buyback. If it is not covering then you might then have a problem.

And you could do this analysis on both a yearly trend and quarter trend, but that would be for another blog…

As mentioned above McDonald’s has been using leverage for many years now to finance buybacks and dividends. Similarly, General Electric was struggling over the last few years. As always and as the oil sector showed in 2015-2016, one of the questions to answer is to know if deterioration or improvement in FCF is just temporary or more structural.

Looking at earnings growth expectations, we should then consider which part is “organic” = coming from GDP growth and which part is from reducing number of shares for instance. We always need to keep in mind that buybacks in the long run should be financed by FCF. Meaning that in a downturn or slowdown, they will be affected.

To finish one a positive note, I would like to share the Top 20 Free Cash Flows expectations for the next 3 years.

Company 2020e 2021e 2022e
AAPL 61,238 63,164 67,264
MSFT 39,063 44,978 45,078
AMZN 29,457 38,285 51,140
T 28,094 27,652 26,407
GOOGL 27,473 34,992 41,884
JNJ 19,843 23,706 26,490
FB 19,069 22,694 28,324
VZ 17,907 19,460 19,644
WMT 16,067 16,763 17,230
CVX 15,204 16,826 16,052
CMCSA 14,595 16,620 17,856
INTC 14,447 15,285 16,319
UNH 14,265 17,095 20,091
CSCO 14,218 15,444 15,368
ABBV 13,443 18,267 19,726
ORCL 12,831 13,345 14,590
TFX 12,513 14,827 18,414
PG 12,372 13,059 14,047
V 12,056 14,711 16,920
IBM 11,949 12,441 12,830

That is almost $1.4 Trillion of FCF expected to be generated in the next three years by those 20 companies alone. Or the top 20 FCF combined for 2020e represent roughly the Gross Domestic Product of Norway.

I hope it helps,