Bonus Episode: Jeremy Schwartz - Net Buybacks Supplement Dividend Yields and Support Future Per Share Growth

Episode Summary

Executive Summary: This bonus episode promotes The Best Investment Writing, Volume 2 and features Jeremy Schwartz arguing that falling dividend payout ratios and rising net buybacks have materially boosted per-share earnings growth. He contends this structure may support 6%-7% annual EPS growth over the next decade, making long-run equity returns less pessimistic than CAPE-based forecasts imply.

Main Topics: Book promotion and charitable proceeds (Priority: 2/5): The host introduces the second volume of The Best Investment Writing, highlighting its expanded collection of 41 articles and noting that author proceeds go to charity. Valuation concerns in today’s market (Priority: 4/5): Schwartz compares the current big-cap tech dominated market to the late-1999/early-2000 period, when valuations were seen as stretched and investor expectations were overly exuberant. Critique of CAPE-based return forecasts (Priority: 5/5): He references Schiller and Bogle’s subdued long-term return outlooks, which rely on high valuations and mean reversion, and argues these projections may miss key structural changes. Dividend payout ratios and earnings growth (Priority: 5/5): A central claim is that the market’s dividend payout ratio has fallen materially since 2000, implying more capital is being retained for reinvestment and buybacks, supporting future EPS growth. Stock buybacks as a driver of per-share growth (Priority: 5/5): Schwartz emphasizes that net buybacks reduce share counts and can lock in higher future EPS growth, making simple historical earnings-growth extrapolations misleading. Margins, globalization, and the limits of mean reversion (Priority: 4/5): He argues that low interest rates, higher-margin business models, and greater foreign revenue exposure may keep margins elevated, weakening the case for mean-reverting profitability. Moderate but constructive long-term market outlook (Priority: 4/5): Schwartz ultimately favors Jeremy Siegel’s framework, which implies roughly 5% real long-term returns plus inflation, rather than the more pessimistic forecasts of bears.

Key Arguments: Historical dividend payout assumptions are no longer reliable because firms now retain more earnings for reinvestment and buybacks rather than distributing them as dividends. Lower payout ratios can translate into faster per-share earnings growth, since fewer shares outstanding magnify EPS even if aggregate profits grow at a modest rate. Net buybacks are not wasted capital; they can support future EPS growth and potentially push annual earnings growth above long-term historical averages. CAPE-based models may overstate future pessimism if they ignore structural changes in payout policy, share repurchases, and business mix. Earnings growth since 1982 has already outpaced the pre-1982 period, suggesting the market’s evolving capital allocation structure is economically meaningful. High margins may persist because of low rates, global revenue mix, and lower effective tax environments, reducing the odds of classic mean reversion. Siegel’s valuation-based return estimate of about 5% real return is presented as a more reasonable long-term guide than deeply bearish projections.

Data Points: Number of articles in Volume 2: 41 - The new edition of The Best Investment Writing expands to 41 hand-selected articles. Dividend payout ratio before 2000: 60% average - Schwartz cites a 10-year smoothed payout ratio averaging 60% before 2000. Dividend payout ratio since 2000: 40% average - He says the payout ratio has averaged 40% since 2000, indicating more retained earnings. Dividend yield in Bogle-style model: 2% - Used as the starting point in Jack Bogle’s long-term return estimate. Expected earnings growth in Bogle-style model: 4% - Bogle’s estimate added to dividend yield in his 10-year return framework. Valuation drag in Bogle-style model: -2% - Represents anticipated decline in valuation ratios over the coming decade. Implied nominal return in Bogle-style model: 4% - Derived from 2% dividend yield + 4% growth - 2% valuation compression. Implied real return in Bogle-style model: 2% - Assumes 2% inflation on top of the 4% nominal return. Dividend yield pre-1982: ~5% - Schwartz references Schiller’s data on average market dividend yield before 1982. Dividend payout ratio pre-1982: Nearly two-thirds - Historical average distribution of earnings as dividends before 1982. EPS growth pre-1982: 3.3% per year - Average earnings growth when firms paid out roughly two-thirds of earnings. Dividend payout ratio since 1982: 51% average - Lower payout ratio during the buyback era. EPS growth since 1982: 5.6% per year - Average EPS growth during the period of declining payout ratios. Increase in EPS growth: 230 basis points - Difference between 5.6% post-1982 growth and 3.3% pre-1982 growth. 2017 EPS growth: 16% year-over-year - Latest year cited as evidence of strong earnings growth. Dividend yield in 2017: 2% - Average dividend yield mentioned for 2017. Dividend payout ratio in 2017: 45.6% - Latest year’s payout ratio cited during the discussion. Net buyback ratio, latest trailing 12 months: 1.84% - S&P 500 trailing 12-month net buybacks supporting EPS growth. Projected EPS growth next decade: 6% to 7% per year - Schwartz’s estimate based on lower payout ratios and buybacks. Siegel’s long-term real return estimate: 5% - Return estimate based on market yield and valuation framework. Siegel’s nominal return estimate with inflation: 7% - 5% real return plus 2% inflation. Historical long-run U.S. equity return: 6.5% to 7% - Benchmarked against Siegel’s projected nominal return.

Pivotal Quotes: "Net buybacks, supplement dividend yields and the support future per share growth." — Jeremy Schwartz: Title of the chapter he reads from, summarizing the core thesis. "I can see a case that earnings growth picks up even further from that 5.6% per year mark." — Jeremy Schwartz: His bullish argument that declining payout ratios could lift future EPS growth beyond recent historical averages. "I think his model for looking at the markets makes more sense than some of these more dour predictions for what that's worth." — Jeremy Schwartz: Schwartz’s closing endorsement of Jeremy Siegel’s more balanced return framework.

Implications: Investors should not assume past earnings-growth norms will hold if buybacks and lower payout ratios continue. Structural capital-allocation changes may sustain EPS growth and support moderate long-term equity returns, even if headline valuations remain elevated.