Examining the relationship between the firm’s net payout yield and the subsequent
stock returns for non-US equity markets, the author concludes that a higher net payout
yield has a positive impact on the stock returns in international equity markets.
Using a net payout yield measure that accounts for cash flows associated with dividends,
share repurchases, and share issuances, the author empirically proves that a higher net
payout yield for a given firm improves the firm’s stock returns in international
How Is This Research Useful to Practitioners?
Investors around the world look for indicators that can provide them with better insight
about the investable universe. Dividend yield is one such parameter that has provided useful
insights about promising investment opportunities. The author uses a more complete yield
measure that accounts for dividends, share repurchases, and share issuances known as net
payout and examines the relationship between net payout yield and subsequent stock
The author develops three hypotheses: (1) There is a significant positive relationship
between net payout yield and subsequent stock returns for a given firm; (2) the return
difference between firms with a high net payout yield and firms with a low net payout yield
is not absorbed by such cross-sectional determinants as firm size, book to market, and
momentum; and (3) the predictability quotient of the net payout yield is better than that of
the dividend yield in forecasting subsequent stock returns.
Using stock returns from 1994 through 2014, the author tests his hypotheses and finds
support for all three hypotheses. His results prove that the net payout yield, which is
defined as the sum of distributed dividends plus share repurchases minus share issuances
divided by market equity, is positive for subsequent stock returns and has a better
return-predictive ability than the dividend yield.
How Did the Author Conduct This Research?
The sample data include 104,910 firm-year observations from 20 non-US equity markets for
July 1994–June 2014. The author excludes the 5% of firms with the lowest market equity
in each market to avoid distortion in results by tiny or illiquid stocks.
He uses the following variables: a firm’s size, represented by market equity as of
June of every year; the book-to-market ratio; momentum, which is the cumulative prior
12-month stock return; the dividend yield, which is the sum of the distributed dividend
divided by market equity; and the net payout yield, which is the sum of distributed
dividends plus stock purchases minus share issuances divided by market equity.
The author examines the return-predictive ability of net payout yield and concludes that it
is the strongest determinant of the cross section of international stock returns. This study
assumes importance in the changing payout behavior of firms around the world because it uses
a more complete measure of yield accounting for dividend payout, share repurchases, and