SYLD Investment Case
Free cash flow has long been emphasized by investors as a key predictor of a company’s strength. Companies that pay cash dividends, one indication of strong free cash flow, have historically outperformed the broader market. Focusing strictly on dividend payments, however, misses two key indicators of strong free cash flow: net share repurchases and net debt paydown. The manager believes that a focus on all three factors â€“ dividend payments, net share repurchases and net debt paydown, a trio collectively known as shareholder yield â€“ produces a portfolio of companies that offer strong free cash flow characteristics.
The Cambria Shareholder Yield ETF is an actively managed fund that employs the manager’s quantitative algorithm to select U.S. listed companies that show strong characteristics in returning free cash flow to their shareholders. Specifically, SYLD invests in 100 stocks with market caps greater than $200 million that rank among the highest in (a) paying cash dividends, (b) engaging in net share repurchases, and (c) paying down debt on their balance sheets.
Why Invest in SYLD
- A Focus on Dividends Alone Misses the Broader Picture - Rather than just focusing on dividend payments alone, SYLD invests in U.S. listed stocks that couple strong dividend payments with share repurchases and debt paydown. The manager believes that selecting companies that show strength in all three dimensions is a superior methodology for identifying stocks that possess strong cash flows and that have the potential to reward shareholders with higher yields.
- Share Repurchases have Outpaced Dividends - According to data compiled by Robert Shiller, in his book Irrational Exuberance (2009), over the past 70 years, companies have continued to pay a lower and lower percentage of their earnings in cash dividends. Due to tax treatment and regulatory changes in the 1980s, U.S. companies have shifted their payout mix to include more share buybacks, and according to research conducted by Jeremy Schwartz, in his February 2012 "Investment Insights" paper, seven out of the ten S&P 500 sectors in 2011 offered a higher yield resulting from share repurchases than resulting from cash dividend payments.
- Classic Value Investment Approach - A long-held pillar of investment success provides that investors should buy the stocks of companies that exhibit strong free cash flows and return that cash to investors in the form of dividend yield. The SYLD portfolio has the potential benefit of investing in classic value companies that are also buying back their stock and reducing their debt.
- Diversification - The fund offers a broad portfolio of US companies of different sizes, industries and sectors, providing investors with a diversified equity portfolio. The manager employs maximum sector percentage caps to ensure that the portfolio is not concentrated in any one sector.
- Pioneering Product - SYLD is the first ETF to focus on the three factors we define as constituting shareholder yield -- dividend payments, share buybacks, and debt paydown. The prospectus covering SYLD also lists future shareholder yield ETFs focusing on foreign developed countries (Cambria Foreign Shareholder Yield ETF: FYLD) and emerging markets (Cambria Emerging Shareholder Yield ETF: EYLD).
- Advantage of Active ETFs - Investors will receive the benefits and flexibility of the ETF vehicle, including the ability to be traded using limit and stop loss orders as well as on margin, intraday pricing, transparency of holdings, lower expense ratio, and a single-share investment minimum, all underlying Cambriaâ€™s actively managed, risk-managed portfolio design.