Inflation levels are low and expected to remain low—but that’s no excuse for not protecting against unexpected moves, according to Meketa Investment Group.The Boston-based consultant advocated for allocations to inflation-protected bonds and real assets to safeguard portfolios against sudden inflation spikes.“Holding assets that do not decline in real value during unexpected inflationary periods enhances the ability of the total portfolio to make payouts while protecting its value on the downside,” the authors wrote. “This diversification reduces the volatility of the total portfolio’s value, even though the inflation-hedging assets may demonstrate considerable volatility when viewed in isolation.”
Shareholder yield measures the cash paid out both as dividends and as stock buybacks.
Shareholder Yield = Dividend Yield + Buyback Yield
Buyback Yield = Change in Number of Shares Outstanding ÷ Previous Number of Shares Outstanding
Shareholder yield can be looked at in addition to the dividend yield to see what kind of a return the shareholder will receive through the company’s capital allocation policy.
A study by Wesley Gray and Jack Vogel of Alpha Architect (“Enhancing the Investment Performance of Yield-Based Strategies,” SSRN, 2012) found that stocks with shareholder yields ranking in the top 40% experienced higher annualized returns, particularly those ranking in the top 20%.
The final point is that stock prices reflect a set of expectations for future financial performance. A company’s stock doesn’t generate excess returns solely by the company creating value. The company’s results have to exceed the expectations embedded in the stock market. – Michael Mauboussin
Edward Altman says the benign credit cycle is in “extra innings,” but the metaphorical relief pitchers — central bankers — are running out of gas.