Peter Lynch didn’t look for high shareholder yield stocks. He focused on other key variables. But combining his criteria with shareholder yield can produce some interesting results. But before we do that and see the highest scoring stocks, let’s focus on some basics of shareholder yield.
What is Shareholder Yield?
Shareholder yield is a comprehensive measure of how companies return value to their shareholders. It combines three key components: dividends, share buybacks, and debt reduction. This metric provides a more holistic view of a company’s shareholder-friendly practices compared to dividend yield alone.
Shareholder yield is important because it reflects a company’s commitment to returning capital to its investors. High shareholder yield can indicate that a company is generating strong cash flows and is focused on creating value for its shareholders. This approach aligns with Peter Lynch’s investment philosophy of finding companies with strong fundamentals and shareholder-friendly management.
Validea’s Peter Lynch Strategy Criteria
Validea’s interpretation of Peter Lynch’s investment strategy focuses on several key criteria:
- The Price-to-Earnings to Growth (PEG) ratio: Lynch favored stocks with a PEG ratio below 1, indicating that the stock is undervalued relative to its growth rate.
- Earnings growth: The strategy looks for companies with consistent earnings growth, typically between 20% and 50% annually.
- Debt levels: Lynch preferred companies with low debt-to-equity ratios, as this indicates financial stability.
- Inventory management: For applicable companies, the strategy checks if inventory growth is not outpacing sales growth.
- Free cash flow: While not a requirement, positive free cash flow is considered a bonus.
- Size and industry: Lynch used different criteria for different types of companies, categorizing them as “fast-growers,” “stalwarts,” or “slow-growers.”
5 High Shareholder Yield Stocks Peter Lynch Might Like
Let’s examine five stocks that combine high shareholder yield with characteristics that align with Lynch’s investment criteria:
1. Bread Financial Holdings Inc (BFH)
Bread Financial Holdings, a tech-forward financial services company, passes Validea’s Lynch model with a remarkable 96% score. The company’s PEG ratio of 0.36 is well below the desired threshold of 1, indicating potential undervaluation. BFH’s earnings per share (EPS) growth rate of 11.85% falls within Lynch’s “stalwart” category. The company also boasts a healthy equity-to-assets ratio of 14%, surpassing the 5% minimum threshold Lynch looked for in financial companies. Additionally, BFH’s return on assets (ROA) of 2.22% exceeds the 1% minimum, further demonstrating its profitability and efficiency.
2. Commercial Metals Company (CMC)
Commercial Metals Company, a steel and metal manufacturer, achieves a 93% score on Validea’s Lynch model. CMC’s PEG ratio of 0.29 suggests significant undervaluation relative to its growth rate. The company’s EPS growth rate of 35.8% places it in the “fast-grower” category, which Lynch particularly favored. CMC’s debt-to-equity ratio of 28.19% is considered acceptable, indicating a solid financial position. The company also passes Lynch’s inventory-to-sales test, showing efficient inventory management.
3. Mr. Cooper Group Inc (COOP)
Mr. Cooper Group, a home loan servicing and origination company, scores an impressive 93% on Validea’s Lynch model. COOP’s PEG ratio of 0.38 suggests undervaluation, while its EPS growth rate of 22.37% categorizes it as a “fast-grower.” The company’s equity-to-assets ratio of 29% far exceeds the 5% minimum for financial companies, indicating a strong balance sheet. COOP’s ROA of 4.88% also surpasses Lynch’s 1% threshold for financial firms.
4. G-III Apparel Group Ltd (GIII)
G-III Apparel Group, a designer and manufacturer of apparel, scores an outstanding 96% on Validea’s Lynch model. GIII’s PEG ratio of 0.20 indicates significant undervaluation relative to its growth rate. The company’s EPS growth rate of 37.5% places it firmly in the “fast-grower” category. GIII’s debt-to-equity ratio of 27.37% is considered acceptable, and the company passes Lynch’s inventory-to-sales test, demonstrating efficient inventory management.
Bank OZK, a regional bank, achieves a perfect 100% score on Validea’s Lynch model. OZK’s PEG ratio of 0.30 suggests significant undervaluation. The bank’s EPS growth rate of 22.2% categorizes it as a “fast-grower.” OZK’s equity-to-assets ratio of 15% and ROA of 2.08% both exceed Lynch’s thresholds for financial companies. Additionally, the bank’s net cash position is considered a bonus factor in the Lynch model.
The Lynch-Shareholder Yield Connection
These five companies not only demonstrate high shareholder yields but also align closely with Peter Lynch’s investment criteria as interpreted by Validea. They exhibit strong earnings growth, attractive PEG ratios, and solid financial positions – all characteristics that Lynch valued in his stock selections.
The combination of high shareholder yield and Lynch’s criteria could potentially identify companies that are not only returning value to shareholders but also positioned for future growth. This approach aligns with Lynch’s philosophy of finding undervalued stocks with strong fundamentals and shareholder-friendly management – a strategy that served him well during his legendary tenure managing the Magellan Fund at Fidelity.
