Grinold-Kroner Formula

CFA Level III Economics
#1

I am having some confusion with this formula, however I am clear with the information within the schweser. However in the example given in the book is creating a confusion. Here it goes:

Suppose an analyst estimates a 2.1% dividend yield, real earnings growth of 4.0%, long term inflation of 3.1%, a repurchase yield of -0.5%, and P/E re-pricing of 0.3%:

expected current yield (income return) = 2.1% - 0.5% = 1.6%

According to text in the book above underlined should be a positive as its a repurchase which is a reduction in shares outstanding so two negatives combines to be a positive number. How come its still a negative in the formula. Could anyone please clear this thing for me.

Thanks

#2

.5% is the reduction in the number of shares outstanding which means they repurchased the shares which is a dividend to the shareholders

#3

I noticed that they present the repurchase piece two ways - sometimes as “Repurchase Yield” and others as “Change in Shares Outstanding”

Repurchase Yield

  • If presented positive: subtract a negative (add)
  • If presented negative: subtract a positive (subtract)

Change in Shares Outstanding

  • If presented positive: subtract a positive (subtract)
  • If presented negative: subtract a negative (add)

This makes sense intuitively because if the repurchase yield is positive, there were repurchases in the time period indicating a negative change in shares outstanding.

Please correct me if I’m wrong

1 Like
#4

Note that it doesn’t say that they’re repurchasing 0.5% of the outstanding shares; it says that there is a _ repurchase yield _ of -0.5%.

I take that to mean that they’re issuing new (or previously repurchased) shares amounting to 0.5% of the outstanding shares.

#5

This is the first time I have ever not been in agreement with S2K, not saying that I am right

#6

Think back to L2. For a company to pay a dividend they could either pay cash dividend or to avoid signaling they could repurchase one time

#7

Thanks a lot. I got it.

#8

I agree with Bill, and as YoungMan24 pointed out, it’s all about how it’s presented.

A positive repurchase yield is a net positive yield, which implies shares are being bought back, and it would be added to the dividend yield for the income component.

A negative repurchase yield is a net negative yield, which implies shares are being issued, and would be subtracted from the dividend yield for the income component.

#9

Thanks specially to u sir.

#10

Had the same issue…just think of it as buying back as a percent of total value (Investopedia to the rescue) if it’s positive. If it’s negative, they issuesd.