U.S. Equity Shareholder Yield
Seeks superior total and risk-adjusted returns with high dividend income and below-market volatility.
At a Glance
Our U.S. Equity Shareholder Yield strategy pursues attractive total returns with an above-average level of income by investing in a diversified portfolio of U.S. companies with strong and growing free cash flow. Companies in the portfolio possess managements that focus on creating value for shareholders through consistent and rational capital allocation policies with an emphasis on cash dividends, share repurchases and debt reduction — the key components of shareholder yield. The portfolio generally holds between 75 and 120 stocks, with risk controls to diversify the sources of shareholder yield and minimize volatility.
The U.S. Equity Shareholder Yield Opportunity
- Access to a portfolio of high-quality U.S. companies with attractive income and capital appreciation potential
- Portfolio holdings generate strong free cash flow and use their excess cash to provide shareholder yield — dividends, share buybacks and debt pay downs — without taking undue business risk
- Active management by an investment team with an average of over 20 years of experience
- Risk management integrated with the investment process, seeking to achieve the least possible volatility for the return characteristics sought and capital preservation in down markets
- Cash-flow-oriented approach and low beta complements other managers within an overall asset allocation plan
Epoch’s Distinct Investment Philosophy and Approach
The bedrock of our philosophy is that the growth and applications of free cash flow represent the best predictor of long-term shareholder return. As a result, our security selection process is focused on free-cash-flow metrics and capital allocation as opposed to traditional accounting-based metrics such as price-to-book and price-to-earnings. We look for a consistent, straightforward ability to generate free cash flow and to allocate it effectively among internal reinvestment opportunities, acquisitions, dividends, share repurchases and debt pay downs. An essential factor is the evaluation of each company’s management team to confirm their commitment to transparency and building shareholder value. The companies uncovered by this process typically have inherently less volatility due to their ability to generate cash flow.
This strategy uses proprietary quantitative research to identify potential investments. We look for factors including high current dividend yield, growth in cash flow, cash from operations that exceeds dividends and no dividend cancellations. Stocks are then subject to rigorous fundamental research. We develop an investment thesis as we assess the sources of the company’s long-term value creation and management’s ability to nurture it. Management’s track record of allocating capital is scrutinized as we look for those with the discipline to return cash to shareholders if the expected return for other uses of cash does not exceed the firm’s cost of capital. We select stocks that can meet our 5% shareholder yield requirements, with 3% coming from dividends and 2% coming from share buybacks and debt repayments. We also look for a 3% minimum growth rate of cash flow. Once a stock has been purchased for the portfolio, we continually revisit our thesis and sell the stock if it appears the company will no longer be able to provide the required level of shareholder yield or if we see another investment with the characteristics we are looking for with less risk.
While the portfolio is constructed from the bottom up, decisions are made with consideration of the macro context. Epoch’s Investment Policy Group, composed of senior members of our different strategy groups, provides insight and guidance on the global market environment and macroeconomic and industry trends.
We analyze risk as part of the portfolio construction process to monitor portfolio volatility and better ensure the delivery of the strategy’s goals. A senior member of the Quantitative Research and Risk Management team is a co-portfolio manager on every strategy managed by Epoch so that portfolio managers are aware of unintended biases and the effect individual securities may have on the portfolio. The portfolio is diversified across sectors and sources of yield so that no single stock is relied on too heavily to achieve the portfolio’s yield targets.
Of late, people are blaming a variety of economic ills on an unlikely villain: the desire of investors to earn good returns on capital. But, no industry can be expected to survive if it is not creating value for the investors in that industry. Earning good returns on capital is not an obstacle to satisfying consumer demands; it’s what enables companies to continue to satisfy those demands.
This Is Why We Can’t Have Nice Things
Until recently, we had been living in a disinflationary environment that started in the 1980s. We believe three factors – Deglobalization, Demographics and Decarbonization – have led us to a secular reflationary environment. As a result the next decade is going to look quite different than the 2010s, with a number of critical implications for investors.
The transition to net-zero emissions (NZE) involves a fundamental change in the structure of the economy, and will likely be messy, implying periodic supply shortages and even more volatile energy prices. Further, inflation and nominal interest rates will probably be higher and more volatile, especially relative to the levels of the last two decades. This has not yet been priced into markets.
Greenflation: The Energy Transition Will Prove Inflationary
China has launched a new policy framework, “Common Prosperity,” which escalates government steerage of the economy and features two critical initiatives. First, Beijing is taking action to tame the country’s real estate obsession. Second, the “summer blizzard” of regulatory actions has targeted a wide range of tech-related sectors including fintech, social media, online tutoring and gaming. Here, we examine the implications for investors of the pendulum swinging ever further in favor of the state.
China’s “Common Prosperity”: What Does it Mean for Investors?
The recent surge in start-ups and unicorns reflects the broadening of the digital revolution across industries, and suggests improving productivity and free cash flow. Further, although the digitization of the economy is still in early earnings, we expect digital platforms to represent the majority of market cap by 2025, with tech, health care and communications the most promising sectors.
The Pandemic Accelerant Part II: Turbo-Charging the Digital Economy
Inflation risks are at a four-decade high due to today’s combination of a generous Treasury, an overly tolerant Fed, and a reopening economy. While our base-case scenario assumes only a brief period of above-target inflation, investors should brace themselves for more inflation scares, which will likely remain a key driver of equity markets well into 2022.