Buybacks: Fast Food to Finance

04/29/2014 9:00 am EST


David Fried

Editor, The Buyback Letter

Our Buyback Premium Portfolio is beating the S&P 500 by more than 96% since its inception in 2000; here’s a look at the two latest additions to this list, explains David Fried, editor of The Buyback Letter.

Specialty finance company CYS Investments (CYS) seeks to get consistent risk-adjusted income by primarily investing in residential mortgage pass-through certificates where the principal and interest payments are guaranteed by Fannie Mae, Freddie Mac, or Ginnie Mae.

It has a market cap of about $1.3 billion. CYS aims to provide returns to investors through a combination of dividends and capital appreciation, and has been attractive for income investors due to a high dividend yield of 14%-15%.

Analysts pair that with potential price appreciation of 5% and see a potential total return in the neighborhood of some 20%.

The company has taken steps to protect its book value by increasing exposure to 15-year fixed rate assets in favor of 30-year fixed rate assets. CYS has reduced shares outstanding by 7.58% in the past 12 months.

Fast food purveyor The Wendy’s Co. (WEN) has more than 6,500 franchise and company-operated restaurants in the US and 28 countries.

Wendy’s has been undergoing change—which it calls a “System Optimization Initiative”—for the past half a year, transitioning into a franchise-based model.

It has sold 418 company-operated restaurants in 13 US markets (primarily in the west), so as to geographically concentrate ownership for efficiencies.

This initiative reduced total system ownership from 22% to 15%. Underperforming stores were closed, “re-imaging” of 180 stores began and 100 new stores were planned.

This strategy has included the recent sale of 104 restaurants in four big markets—Phoenix, LA/Palm Springs, Hawaii, and Albuquerque—to what they call “strong, highly capable franchisees.”

Meanwhile, management has reduced the shares outstanding by 6.81% in the last 12 months.

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