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. Previously, KKR distributed 75%–80% of its earnings with an annualized yield of ~8%. Alternative managers have been in buyback mode since their valuations declined in the 2016 market rout.
KKR wants to retain more cash on its balance sheet by declaring a fixed dividend. This 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. This strategy can be supported if the company has more capital to deploy.
KKR employees and senior management hold ~45% of the company’s shares. The company thinks that it can manage money better for its employees and other shareholders. With a balance sheet of $13 billion, its annualized distribution yield stands at 3.6%.
KKR’s peers 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 generated a CAGR (compound annual growth rate) of 13% on its book value per share over the past six years. If you 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 thinks that its shares are undervalued, so it will continue its buyback program. It could increase the allocation from the existing $500 million.