Reliance Steel And Aluminum Offers Payout Growth
Contrarian Outlook | Aug 30, 2022 05:33AM ET
There’s a group of dividend stocks out there that are set to skyrocket as the new “Biden buyback tax” rolls in.
These “dividend moonshots” are hiding in plain sight. Most people miss them because they’re looking at the wrong numbers: they’re obsessed with “first level” measures like dividend yields, P/E ratios or whatever.
But we second-level thinkers only need one indicator to find these cash machines, which are poised to profit in a surprising way as the new tax takes effect. I’m talking about a potent number called shareholder yield.
This metric isn’t on any screener, so it takes a couple minutes’ legwork to figure out. The payoff? It lets us sift out stocks that throw off 27%+ payout hikes, 6% yields and prices that soar 200%+. (I’m not making those stats up: I’ve found an overlooked steelmaker that delivers all three. I’ll drop the ticker in a second.)
h2 The Shareholder-Yield 3-Pack/h2I’ll admit that “shareholder yield” sounds a little jargon-y, but it’s really only made up of the three ways dividend stocks have to pay us:
- The current dividend payout: This, of course, is the dividend we get after we buy. It’s the one you see on your screener and on the research page of your brokerage account.
- Dividend growth, which is highly underestimated by most folks, but it shouldn’t be, because it increases the yield on our original buy and acts like a “magnet” on the share price, with the rising payout pulling the stock higher (we’ll see this effect in real time in a moment).
- Share buybacks, which cut the number of shares outstanding, juicing earnings per share and other per-share metrics (which tends to lift the share price).
Put all three together and you get shareholder yield. And by looking at the shareholder yield of our favorite dividend stocks, we can tell exactly which ones the looming Biden buyback tax is likely to send to the moon. I’ll give you a head start by naming one of these tickers now.
h2 Dividends, Buybacks and Payout Growth—This Steelmaker Uses Them All/h2Reliance Steel & Aluminum (NYSE:RS) is a California-based company that offers more than 100,000 metal products in various shapes and sizes.
Right off the bat, most “screener surfers” would turn up their noses at Reliance due to its “low” current yield of 1.8%. But let’s ignore that for a second and factor in Reliance’s payout growth, which has been spectacular. You can see its Dividend Magnet in action, too:
h2 Reliance’s Dividend Growth Drives Big Share-Price Gains
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If you have any doubts that a rising payout is the No. 1 driver of share prices, this should put them to rest. The pattern is unmistakable! And because of that payout growth, folks who bought Reliance a decade ago don’t care about today’s miserly 1.8% payout: they’re yielding a stout 6.8% on their original buy!
This is, hands down, the safest way to get a high yield from a stock. And I fully expect that anyone who buys today will be looking at just as big of a yield on their buy 10 years out.
Now let’s move on to buybacks, because they’re the target of the Biden tax: Reliance is a heavy buyer of its own stock, so it’s in the path of the new law: it’s taken 10% of its shares off the market in just the last three years, boosting its free cash flow per share and dividends per share (and by extension helping lift its share price) in the process.
h2 Buyback Tax Would Ignite Reliance’s Dividend (and Our Gains)/h2So what does the new tax mean for holders of the stock?
If Reliance CEO James Hoffman does anything in response to the 1% Biden buyback tax, I can tell you what it’ll be: he’ll go around the tax by redirecting some of his buyback cash into dividends. And we know that Hoffman has no hang-ups about delivering big dividend hikes: Reliance’s last one, announced in February, clocked in at a 27% increase!
That makes our strategy simple: we’ll zero in on stocks like Reliance, that deliver big buybacks and healthy dividend payouts. That way, when the tax hits, they’re more likely to shift toward dividends, giving us more of our return in cash and turning up their “Dividend Magnets” in the process.
Before I sign off, let me leave you with a simple way to calculate shareholder yield. Run this calculation on your favorite dividend growers and you’ll see that you’re likely getting a lot more than you’d think if you just looked at the stock’s current yield on its own.
h2 3 Simple Steps to Calculating Your Stock’s 'Real' Yield/h2To arrive at a stock’s shareholder yield, just take the amount spent on share repurchases in the preceding 12 months, deduct any cash brought in through share issuances, then add in the total spent on dividends.
You then take that sum and divide it into the company’s market cap, or the value of all its outstanding shares.
For Reliance, that comes out to $199 million spent on dividends and $510 million on buybacks in the 12 months ended June 30, 2022, for a total of $709 million in shareholder returns. So with an $11.75-billion market cap, Reliance sports a 6% shareholder yield—much more than the 1.8% current dividend yield you’ll see on screeners.
Disclosure: Brett Owens and Michael Foster are contrarian income investors who look for undervalued stocks/funds across the U.S. markets. Click here to learn how to profit from their strategies in the latest report, "7 Great Dividend Growth Stocks for a Secure Retirement ."
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