Stock buybacks for 2021 might exceed $1 trillion according to preliminary data from Standard & Poor's. That's a big number.
To put it in context, the market capitalization of the New York Stock Exchange (NYSE) at the end of December 2021 was $27 trillion, suggesting that about 4% of shares are being repurchased.
But it's not the size of the buybacks in any given year that gives them importance, rather the fact that this action is a steady drip that takes shares off the market and provides upward pressure on earnings per share. And this, in turn, pushes stock prices higher.
To see this constant shrinkage in black and white, consider that today's NYSE aggregate market cap is just about the same as it was in 2014. So, even though the NYSE Composite index has nearly doubled since 2014, the overall market has stayed the same.
At the company level, the impact from these stock buybacks can be even more dramatic. Many firms, rich with cash, throwing off more from operations, and with adequate resources to fund capital spending, have no need for any more cash. This has allowed them to shrink themselves over time and has enabled even modestly growing organizations, say like railroads, to deliver spectacular total returns.
Nirvana for stock market investors, anyway, might be fundamentally superior companies that are actively reducing their share counts and pushing up their earnings per share. Below, we take a closer look at six such companies actively involved in stock buybacks.
Data is as of March 22. Dividend yields are calculated by annualizing the most recent payout and dividing by the share price.
Procter & Gamble
- Market value: $364.0 billion
- Dividend yield: 2.3%
- Five-year reduction in shares outstanding: 4.8%
In a world seemingly upside down, there are few things investors can count on. But on that short list are consumers washing their clothes, brushing their teeth and taking plenty of Pepto-Bismol for understandably queasy stomachs. Procter & Gamble (PG (opens in new tab), $151.88) caters to these needs.
Even though the company has 65 brands and sells its products in 180 countries with operations in 70 of them, financially, PG is quite easy to understand. The story is told mostly through its cash-flow statement.
In its last fiscal year, which ended on June 30, 2021, P&G threw off just over $18 billion in cash. Notably, capital spending on things like plants and equipment were $2.7 billion. This means the company had about $15 billion, plus another $16 billion of cash on hand, for financial engineering.
Procter & Gamble used this to restructure its debt, but more importantly, pay $8.3 billion in dividends to shareholders and buy $11 billion of its own shares back. All that and the company still had over $10 billion in the bank. Overall, share buybacks are up from $5 billion in 2019.
The capital spending figure of "just" $2.7 billion is notable because the company's operating margin – gross profit less operating expenses – is marching steadily upward. Over the past decade, it has risen from 22.6% to 27.8% for the recent fiscal year. That's an increase of 23%.
Meanwhile, the share count for the consumer staples stock has declined from a high water mark of 3.2 billion shares in 2006 to today's level of about 2.4 billion – a reduction of roughly 24%. Combined, the two impose sustained upward pressure on earnings per share.
Shares have nearly doubled over the last five years, and the dividend is a respectable 2.3%. Even better, S&P has deemed P&G a "safe stock," and it has earned Value Line's highest rating for safety.
- Market value: $65.2 billion
- Dividend yield: 0.9%
- Five-year reduction in shares outstanding: 7.2%
Sherwin-Williams (SHW (opens in new tab), $250.17) is a poster child for the challenges companies face in these times. A supply chain in disarray was further hobbled by Hurricane Ida which took manufacturing of essential resins, additives and solvents offline.
Add to that inflation that is increasing costs and tempering the enthusiasm of customers. And finally, pandemic-fueled nesting, which the company caters to, reached a peak in 2021, making earnings this year look poor by comparison.
Sherwin-Williams has not been immune: Shares have slipped from all-time highs of $352 in December to around $250 now.
Amid this malaise, who might have faith in Sherwin-Williams? For starters, Sherwin-Williams. The company is an inveterate buyer of its own stock. Last year it bought back $2.8 billion of its own stock.
For a company with a $65-billion market cap, this might seem incremental, but given its commitment to share repurchases, the long-term impact is meaningful. Consider this, going back to 2005 – as far as data is available on Value Line – shows SHW with 405 million shares outstanding. At the end of 2021, the share count stood at 262 million, a total reduction of 35%. This has created a constant upward push on earnings per share.
So time might be on the side of SHW investors. And for those who are okay with waiting, the yield, though small at 0.90%, is a grower, with Sherwin-Williams an elite member of the S&P 500 Dividend Aristocrats. And according to Value Line, the annual dividend, which is now $2.60 per share, has grown at an average annual rate of 12% over the last 10 years. With cash flow per share of nearly $10.00, it's safe too.
- Market value: $103.0 billion
- Dividend yield: 1.6%
- Five-year reduction in shares outstanding: 11.4%
With the pandemic reshaping the behavior of consumers, Target (TGT (opens in new tab), $222.77) clearly capitalized and came out on top. The company delivered $106 billion in total revenue in 2021, having grown nearly $28 billion, or more than 35%, since the pandemic began.
Apart from the company's plans to scale its operations in 2022 by investing up to $5 billion in physical stores, digital experiences, fulfillment capabilities and supply-chain capacity, Target is also planning to reinvest $15 billion on itself in another share buyback program which they announced back in August 2021.
The company bought $2.3 billion worth of its shares in the fourth quarter of 2021, retiring 9.7 million shares of common stock at an average price of $237 per share. It also paid $432 million in dividends in the same quarter, 32.4% more than the previous year's $341 million, showing TGT's dedication returning capital to shareholders.
Target has consistently been buying its shares, reducing the outstanding count by more than 28% in a decade, from 669 million in 2011 to 480 million in 2021.
As always, caution is merited. Post-pandemic shopping patterns may prove disruptive to TGT, and inflation is sure to put pressure on gross and operating margins. While Target has always been a smart operator and has managed the pandemic well, as the most recent headlines demonstrate, there is always more disruption over the horizon.
- Market value: $2.75 trillion
- Dividend yield: 0.5%
- Five-year reduction in shares outstanding: 17.2%
Two facts put Apple's buyback in perspective. First, Apple has shrunk its shares outstanding by 35% over the past decade according to Value Line. Second, the value of these buybacks totaled $488 billion. This is enough to buy out Boeing (BA (opens in new tab)), General Motors (GM (opens in new tab)) and Ford (F (opens in new tab)), with nearly $250 billion left over for additional shopping.
The big knock on Apple these days is that the growth of the iPhone, while not over, is relegated to the success of upgrade cycles. For the most recently reported quarter, iPhone sales were up 9%; impressive, but way down from the double-digit growth of yore.
But AAPL has lots of paths to growth, and the most often cited are a seemingly endless array of services including streaming entertainment, credit cards, books and news among other items. Services account for about 20% of sales, have margins north of 70% and have doubled over the last four years.
If you believe the growth story remains intact and want to know if the company has the financial strength to feed it while maintaining a cushion against adversity, the answer is likely yes. This question might begin and end with the most recent balance sheet showing a cash hoard of $64 billion, about six times debt due this year.
That's cash on hand. But for the quarter ended Dec. 31, Apple generated $40 billion from operating activities, against which it paid $3.7 billion in dividends, and purchased $20.5 billion in stock, indicating that both activities can continue and even grow, uninterrupted.
Still, all of this gushing about AAPL should make the skeptical investor a little nervous. Remember, Sears once seemed unassailable and now has just 21 stores left as it lurches toward its inevitable expiration. And when Blockbuster was ubiquitous in the early 1990s, Netflix (NFLX (opens in new tab)) hadn't even been founded yet.
Could it be that Apple's undoing is being plotted in a garage somewhere? Perhaps. But for now, AAPL is one superior company rewarding investors with its share buybacks.
- Market value: $169.3 billion
- Dividend yield: 1.8%
- Five-year reduction in shares outstanding: 19.0%
Riding the rails means riding the American economy. Because they carry fuel, industrial equipment, coal and other commodities – as well as consumer goods – railroads reflect the industrial might of the country. As such, growth at rail companies may not stray too far from gross domestic product (GDP) growth.
However, steady growth combined with a constant reduction of shares outstanding can produce spectacular growth in earnings per share and stock prices too. This is just what Union Pacific (UNP (opens in new tab), $265.86) rail has done.
Consider this: Since 2006, the Union Pacific has cut its share count nearly in half.
The company's appetite for its own shares shows no signs of slowing down. In 2021, UNP bought $7.3 billion of its own shares, up from $3.7 billion the prior year. Further, in February 2022, UNP's board authorized the repurchase of another 100 million shares, which is nearly 16% of the 639 million shares outstanding. The company even instituted a so-called accelerated share repurchase program to speed up its buybacks.
And buybacks are clearly evident on UNP's bottom line. Revenues since 2016 have grown at about 1.5% annually on average. Meanwhile, earnings per share, with some adjustments for non-recurring items, grew at an average annual rate of nearly 12%.
Sentiment for UNP, and for the rails in general, is mixed but skewed positive. Auto volumes and supply-chain disruptions are concerns, while shipments for raw materials and energy are bright spots. Ultimately, the top line of UNP is as diverse and multi-faceted as the economy at large.
But if you are bullish on America and like stock buybacks, UNP merits a closer look.
- Market value: $49.3 billion
- Dividend yield: 1.8%
- Five-year reduction in shares outstanding: 23.4%
NXP Semiconductors (NXPI (opens in new tab), $187.75) is a Dutch concern that makes semiconductors for a variety of end markets. These include automotive, communications, industrial and mobile markets.
Notably, NXPI stock has been hot the last three years, delivering a more than 100% return to investors with a respectable dividend approaching 2%.
Optimism toward the shares – despite current events which have thrown them off all-time highs – is owing to a chip shortage, pricing power (which overcomes the ill effects of inflation) and the market's current fixation with the semiconductor industry.
Underpinning these trends are robust share buybacks that are providing a constant lift to earnings per share.
According to Value Line, share counts have fallen more than 23% from a high water market of 346 million shares in 2017 to an estimated 265 million shares in 2021.
And the buying looks like it will continue apace. In August, NXPI's board authorized a $2 billion buyback, and in January of this year added another $2 billion.
NXP's financial statement shows that for all 2021, the company repurchased a tad over $4 billion worth of its own shares, and this was up from 2020's total of $627 million. In 2019, NXPI purchased about $1.4 billion of its own shares.
All of this buyback activity is, of course, not disconnected from financial performance. Here, NXPI is showing some momentum.
Its most recent year-end report noted a 28% increase in revenues to $11 billion and a nearly 520% surge in operating income. Earnings per share for the year came in at $6.91 – well above the 19 cents per share it reported in the 2020.
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