Big U.S. companies, flush with cash from tax cuts, could buy back a record $650 billion of their own shares this year. That’s good news for the market as a whole, as our cover story in this week’s Barron’s explains (“Why the Buyback Boom Is Bullish for Investors,” May 12).
As our story points out, though, not every company that buys back stock gets a good deal for shareholders. In 2016, General Electric (ticker: GE) spent a massive $22 billion to retire shares at an average price of just over $30. Today, shares sell for less than half that.
Buybacks can make a good company better, under the right circumstances, but they can’t make a weak company good. Longstanding research has shown that the combination of stock buybacks and modest valuations tends to predict handsome stock returns. But that’s on average, not in every case—and as any value investor knows, sometimes companies that look cheap today turn out down the road to have been cheap for a reason.
We screened recently for companies that are projected by Wall Street to spend at least 5% of their stock-market value on shares in their current fiscal year, and whose shares sell for less than 15 times estimated earnings for the next four quarters. We eliminated from our list any that aren’t expected to grow their earnings per share consistently in the years ahead. The result was the 27 companies listed below.
Among the 27, Apple (AAPL), Citigroup (C), and JPMorgan Chase (JPM) got favorable mention in our cover story, and Delta Air Lines (DAL), eBay (EBAY), Marathon Petroleum (MPC), and CVS Health (CVS) were highlighted for their heavy spending on stock buybacks in their most recent fiscal years. Kroger (KR) was recommended in a separate story in Barron’s this week (“Kroger: A Supermarket Stock on Sale,” May 12).
|Ticker||Company||Est. Stock Buyback, Current Fiscal Year ($mil.)||Market Value ($mil.)||Buyback Yield||Forward P/E|
|LEN||Lennar Corporation Class A||2,896||17,281||16.8%||10.4|
|MPC||Marathon Petroleum Corporation||2,985||36,184||8.2%||14.1|
|UAL||United Continental Holdings||1,507||18,477||8.2%||8.6|
|DFS||Discover Financial Services||2,054||26,330||7.8%||9.7|
|AAL||American Airlines Group||1,406||19,878||7.1%||8.0|
|DAL||Delta Air Lines||2,388||36,540||6.5%||8.3|
|ADS||Alliance Data Systems||750||11,604||6.5%||8.7|
|BAC||Bank of America||18,973||315,537||6.0%||11.8|