Income investors often prefer dividend checks to stock buybacks. And the reason is simply that it feels good to get a dividend check every quarter.
Stock buybacks are also known as share repurchase programs. Corporations use these plans to “buy back” their own stock. When this happens, the number of shares declines and the earnings per share rises.
Data for share buybacks is available through September. For the last 12-month period, share buybacks jumped 15% to $445 billion. That’s still a bit below the all time high of $589 billion that was spent on buybacks in 2007.
When it comes to stock buybacks, the most important thing is valuation. Back in 2007, many companies squandered cash by completing share buybacks at very expensive valuations.
Yet in recent years, stocks have been inexpensive on a price-to-earnings basis. As a result, investors have embraced stock buybacks. Today, they’re viewed as pro-shareholder initiatives.
Companies that complete stock buybacks have been top performers. The PowerShares Buyback Achievers (NYSE: PKW) is an ETF that invests in companies that have bought back at least 5% of their stock in the last year. In 2013, the index was up 40% versus a 26% gain for the S&P 500 index. That outperformance has been consistent over the last five years.
In the last quarter, the biggest stock buybacks have been from well-known companies including Apple (NASDAQ: AAPL), Pfizer (NYSE: PFE), and Exxon Mobil (NYSE: XOM).
Looking forward to 2014, I expect we’ll continue to see aggressive share repurchase programs. Earlier this month, three companies announced big share buyback programs. Those include MasterCard (NYSE: MA) at $3.5 billion, Boeing (NYSE: BA) at $10 billion, and 3M (NYSE: MMM) at $22 billion.
The strong performance of stocks that are completing share buybacks is compelling. It’s so positive that even income investors must pay attention to these superior returns.
The good news is that most companies that are doing a share repurchase program also pay a dividend. That dividend may be pretty average. But when you consider the potential for superior share performance and dividend payments, the combination is very attractive.
Looking forward to 2014, I’ll continue to recommend companies like Apple that are aggressively buying back stock and paying dividends. I’ll always prefer owning companies like Apple that are buying back cheap stock. Remember – Apple shares trade at just nine-times earnings. And that makes the share buyback program a very good use of the company’s cash stash.
As you look toward rebalancing your portfolio for the year ahead, you should consider adding shares of companies that are buying back their stock.
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