uploads/2016/04/BS-IR1.png

Why KKR Continued Buybacks and Fixed Dividend Policy in 1Q16

By

Updated

Repurchases, fixed dividends

In 1Q16, KKR & Co. (KKR) bought back $118 million worth of the shares of its announced $500 million share repurchase program in 4Q15. The company also paid a fixed dividend of $0.16 per common share in the first quarter. KKR previously distributed 75%–80% of its earnings with an annualized yield of approximately 8%. Alternative managers have been in buyback mode since the declines in their valuations in the 2016 market rout.

Article continues below advertisement

KKR wants to retain more cash on its balance sheet by declaring a fixed dividend, which translates to an annualized yield of 3.5%–4%. KKR has a history of investing more of its own cash across its investments in order to generate higher returns. The strategy can be further supported if the company has more capital to deploy.

KKR employees and senior management hold approximately 45% of the company’s shares. The company believes it can better manage money for its employees and other shareholders. With a balance sheet of $13 billion, its annualized distribution yield stands at 3.6%.

KKR’s peers have posted the following returns on equity:

  • Carlyle Group (CG): 13.9%
  • Blackstone Group (BX): 28%
  • Apollo Global Management (APO): 3.1%
  • BlackRock (BLK): 12%

Together, these companies form 4.1% of the PowerShares Global Listed Private Equity ETF (PSP).

Higher returns on retention

KKR has generated a CAGR (compounded annual growth rate) of 13% on its book value per share over the past six years. If we consider its fixed distribution policy of $0.64 per share per year and its 17.2% annual balance sheet investment return since 2010, the company could have grown its book value per share at a CAGR of 18%.

KKR perceives its shares to be undervalued, so it will continue its buyback program and could increase the allocation from the existing $500 million.

Advertisement

More From Market Realist