Widely ignored by the market are the stocks that continuously reduce shares outstanding via buybacks. Buybacks routinely obtain a bad rap due to the focus on high profile failures such as Cisco Systems (CSCO) that have had stock blowups after buying at higher prices.
Not focusing on the total population of stocks makes such analysis invalid. On balance, companies that reduce outstanding shares provide for higher earnings per share and stronger rewards to shareholders. Naturally the price paid is crucial, but any company that is actively buying back shares over multiple years will ultimately dollar cost average at attractive prices.
When focusing on large, financially strong companies instead of the speculative growth stocks the results are typically better. Investors should look for stocks that year after year reduce the outstanding shares and in essence slowly take the company private. Without lifting a finger, shareholders own a much larger percentage of the earnings of the below stocks as cash flow is used to buyout shareholders not as excited about the future.
The below figures highlight some of the strongest buyback stocks over the last 5 years. It includes insurance stocks such as Chubb (CB), Travelers (TRV), and WellPoint (WLP) as well as retail in Gap (GPS), auto parts supplier AutoZone (AZO), and satellite communications provider DirectTV (DTV).
The below figures show how this method of picking stocks can indeed be very rewarding. Figure 1 shows the large reduction in shares outstanding for this group. As an example, DirecTV has reduced the outstanding shares by nearly 500M in the last 5 years.
Figure 1 - Total Shares Outstanding
While Figure 1 shows the reduction of shares, Figure 2 more importantly highlights the dramatic percentage reduction of shares for this selection of stocks. On average within these last 5 years, the companies have shrunk outstanding shares by over 40%. My guess is that most investors don't even realize these situations occur.
Figure 2 - Total Shares Outstanding Reduction
For all the investors that question the validity of stock buybacks, Figure 3 highlights how over the last 5 years these large buybacks have solidly outperformed the S&P 500. Of the group, only Wellpoint failed to beat the market and that was only slightly. AutoZone and Chubb both soared much higher providing huge alpha for anybody owning this group of stocks.
Figure 3 - Price Change
On average, the group of stocks gained 58% versus the 17% loss for the benchmark S&P 500. Regardless of this evidence, the naysayer will suggest that this is only a small sample of stocks where the buyback worked out. Any investor with an open mind will hopefully finally realize that large buybacks that shrink the float can actually be very positive for performance.
Additional disclosure: Please consult your financial advisor before making any investment decisions.