Stock buybacks get a bad rap, but for some businesses they can be a shareholder’s best friend.
Low interest rates have left companies scratching their heads over where to invest their money.
Lately, most of them have been returning cash to shareholders by buying back their own stock in the open market.
S&P 500 companies have spent 95% of their earnings this year on buybacks.
Some say buybacks do little more than inflate earnings. The financial media largely vilifies buybacks, criticizing companies for buying back shares instead of reinvesting in their own businesses.
But for some companies, buybacks simply make sense.
The five companies below have been some of the most aggressive when it comes to buying back shares. These companies don’t have plants or equipment that have to be updated to ensure they run more efficiently. These are asset-light businesses, with high margins. They make a ton of cash and can afford to dish some of it out to shareholders.
All five of the companies listed below have soundly beaten the market over the last five years. All of them are up more than 180% over that time period.
Buyback Stock No. 1: AutoZone (NYSE: AZO)
AutoZone has been one of the market’s biggest cannibals of its own shares. The auto parts retailer has decreased shares outstanding by more than 33% over the last five years. Its auto parts and accessories retail business includes some 5,000 stores across most of the U.S., and a presence in Brazil and Mexico.
AutoZone has some of the best margins around. Its return on invested capital of 45% and return on assets of 15% are tops in the industry and rival market leaders. Revenues continue to grow at an impressive rate, and are being driven by the fact that the average age of cars on the road is now above 11 years old. That has led to an increase in demand for auto parts — and is a trend that should continue.
Buyback Stock No. 2: Lowe’s (NYSE: LOW)
This home improvement retailer has been just as aggressive as AutoZone, reducing shares outstanding by an identical 33%. Over the last three years, Lowe’s has been the biggest buyback boss of our five stocks listed. Shares outstanding have been reduced by 22% over the last 36 months.
Prior to the financial crisis, Lowe’s was spending lots of money on expansion. But when the real estate bubble burst, it poured its money into rewarding shareholders. It’s worth noting that Lowe’s pays a 1.4% dividend yield, too.
Lowe’s should continue benefiting from the steady rebound in the housing market. It will also benefit from increasing its online presence, which decreases its need to open stores – and thus reserves more cash for buybacks.
Buyback Stock No. 3: Time Warner Cable (NYSE: TWC)
Time Warner Cable is the second-largest U.S. cable operator in the U.S. It has a large infrastructure, but most of it is already in place. The company is also in the midst of a pending merger with Comcast (NASDAQ: CMCSA), which should further add to its strong cash flow-generating capabilities.
Time Warner has reduced shares outstanding by 20% over the last five years. It also pays the highest dividend yield of the five stocks on our list, at 2.1%.
Buyback Stock No. 4: AutoNation (NYSE: AN)
AutoNation, the largest auto retailer in the U.S., has reduced shares by 33% over the last five years. Like Lowe’s success in the housing recovery, AutoNation has been benefiting from the auto market recovery.
Again, one argument against buybacks is that they artificially boost earnings and possibly hide weaknesses. But one thing that remains hard to inflate is revenues. And AutoNation’s revenues have grown by more than 60% in the last five years.
Though it’s sticking to its aggressive share buyback plan, AutoNation continues to open new stores and buy up dealerships across the nation. What’s more is that AutoNation trades at a price-to-earnings (P/E) ratio of 17, a discount to the S&P 500’s P/E ratio of 20.
Buyback Stock No. 5: The Home Depot (NYSE: HD)
It seems the home improvement space is a great place for high margin businesses that can return cash to shareholders via dividends and buybacks. Along with Lowe’s, Home Depot has been buying up shares – by 22% over the last five years, to be exact. Though it hasn’t been as aggressive in its buybacks as Lowe’s, Home Depot’s dividend yield is superior at 1.9%.
In any case, Home Depot has been growing its top line nicely thanks to its stronghold in the “pro” market. These shoppers are professionals that tend to spend more money and shop more often. Both Lowe’s and Home Depot will be beneficiaries of not just the home-building uptick, but also the remodeling market — where consumers have more money to shop thanks to rising employment.
The five stocks above have coupled their strong top line performance with a robust buyback plan that helps boost earnings. That means a higher stock price for shareholders. Some investors remain squeamish about companies that invest capital into its own shares rather than spending on capital expenditures.
But I’ll leave you with this thought: If you don’t like what the company is doing, you can always sell your shares back to the company as part of the buyback program. Many companies are overlooked by investors because they don’t pay dividends, but share buybacks can be just as great. The five companies above have perfected the art of growing revenues and margins while using excess cash to reward shareholders.
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