I debated the benefits and downsides to both share buybacks and dividends in my last article. I believe a company that pays a dividend while decreasing the outstanding share count is setting its investors up for long-term wealth. Although I personally prefer to receive dividends, effective stock buybacks give investors a greater share of earnings and are helpful for future dividend increases. Here are a few companies that have done an outstanding job of both in recent years, with the percentage decrease in shares outstanding over the past 5 years:
Cisco Systems, Inc. (CSCO) - 12%
Cisco designs, creates, and sells IP based networking along with other communications-related products. CSCO pays a respectable dividend of 2.6%, with a payout ratio of only 25%. The low payout ratio combined with high year-over-year earnings growth signifies the stability and strength of the dividend. Also impressive is the efficiency with which Cisco has recently been buying back shares. Since 2009, outstanding share count has decreased from almost 6 billion to 5.3 billion currently. It is clear that CSCO is providing shareholders with value because the shares that are being bought back are retired. The 12% decrease in shares outstanding has given investors a greater share of the company without purchasing any additional shares. Shown below is the trend in outstanding shares since 2008.
International Business Machines (IBM) - 18%
IBM provides IT products and services worldwide across many different segments. Although the current yield is only 1.6%, the low payout ratio of less than 25% and recent dividend growth lead me to believe that there is potential for solid increases going forward. The buyback program will also ensure that the dividend payments are distributed between fewer shares annually. Since 2008, IBM has reduced shares outstanding by 18% from 1.38 billion to 1.13 billion. This has accelerated EPS growth to an even higher rate than overall earnings growth, providing greater value for shareholders. Here is the recent trend of shares outstanding:
McDonald's Corporation (MCD) - 13%
MCD is the dominant player in the fast food industry with one of the strongest brands in the world. It is currently yielding 3.1%. The current payout ratio and growing income leave plenty of room for future dividend increases. Revenues and cash flows rose over 12% from 2010 to 2011, while net profit margins stayed above an impressive 20%. MCD still has plenty of room to expand globally, including its recent push into India. Shares outstanding have decreased from 1.15 billion to 1 billion in the past 5 years. This 13% decrease along with 5-year dividend CAGR of 13.9% has delivered tremendous value to shareholders. The market has responded favorably as the stock price has almost doubled since 2009. Below is a chart showing the decrease in shares outstanding over the past 5 years.
Philip Morris International (PM) - 20%
Philip Morris is an international manufacturer of cigarettes and other tobacco products. Since its spinoff from Altria (MO) in 2008, PM has provided enormous amounts of shareholder value through dividend increases and aggressive stock buybacks. Outstanding share count has decreased by over 20% since the spinoff, from over 2.1 billion to 1.67 billion. PM also announced a 3-year, $18 billion share repurchase plan this past June. This will ensure that earnings per share rise at an even faster rate than total revenues and allow for more dividend growth. The chart below shows the effectiveness of the buyback program since the spinoff.
Exxon Mobil (XOM) - 15%
Exxon Mobil is one of the world's largest integrated energy companies, focusing mostly on the production of oil. XOM's balance sheet is rock solid with over $200 billion in assets and a debt-to-equity ratio of 0.73. Revenues have been increasing at a high rate, growing from $171 billion in 2009 to $253 billion in 2011. With a low payout ratio of about 30%, XOM is left with plenty of room for capital expenditures and dividend increases. Exxon has decreased its shares outstanding from 5.35 billion in 2008 to 4.56 billion currently, a decrease of 15%. This fact is even more impressive considering XOM issued shares in 2010 to acquire XTO Energy. Shown below is the chart of shares outstanding since 2008.
All of the companies above have tremendous share buyback programs, which, along with increased earnings, allow them to raise their dividends annually. I believe they are solid picks for an investor looking not only for increasing dividend payments, but also capital appreciation over the long-term.