10 Income Stocks Identified Using Share Repurchase Program

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Includes: ACN, CA, CHTR, IBM, KR, MCD, NVO, SYK, TGT, TWX
by: Peter Everett

10 Income Stocks Identified Using Unique Methodology

Many income investors simply screen for stocks based on dividend yield. However, a more accurate way to search for the total cash returned by a company to shareholders each year is to consider not just the dividend yield, but also the percent of shares a company is repurchasing each year. The dividend yield plus share repurchase percentage measure most accurately reflects the total cash being returned to shareholders each year and can provide a good (and overlooked) group of companies to consider rather than traditional screens based solely on dividend yield.

In addition, a share repurchase program is a strongly bullish indicator. Warren Buffett calls a share repurchase program the best polygraph test of a management and Board and I agree; if a company's management has confidence in its future prospects and believes its shares are undervalued, and is sufficiently capitalized to return cash to shareholders via dividends and a share repurchase, that makes a good candidate for income investors. The repurchase plan also provides a degree of downside protection for the stock.

So, I looked for companies with the following characteristics:

  1. Large cap ($10 billion +) with consistent EBITDA (including looking at how their EBITDA held up during the 2007-2010 recession to gauge how they will perform if the economy once again heads south);
  2. Consistently increasing dividend payouts;
  3. Consistent history of share repurchases with announced future/continued share repurchase program;
  4. Trading at reasonable multiple of EBITDA and at reasonable level to latest twelve month high/low (note: I have a strong bias for considering EBITDA, versus earnings, multiples);
  5. Favorable opinion by the analyst community and trading at 5%+ discount to average analyst targeted stock price;
  6. Total cash payout (dividend yield plus share repurchase %) of 4.5% or more.

The list includes some interesting names not normally identified as income stocks (e.g. Accenture).

Here's the list of companies that meet the criteria above:

1. $10 bb+ Market Cap With Consistent EBITDA

Company

Market Cap

EBITDA


2007

2008

2009

2010

2011

2012E

Accenture (NYSE:ACN)

$81

$3.0

$3.5

$3.4

$3.4

$4.0

$4.3

CA Associates (NASDAQ:CA)

13

0.9

1.2

1.5

1.6

1.6

1.7

IBM (NYSE:IBM)

224

19.0

22.1

22.5

23.6

24.2

26.2

Kroger (NYSE:KR)

14

3.5

3.6

3.8

3.7

3.8

3.9

McDonald's (NYSE:MCD)

102

6.8

7.5

7.8

8.6

9.7

10.4

Novo Nordisk (NYSE:NVO)

78

12.1

14.8

17.1

20.7

24.6

28.0

Stryker (NYSE:SYK)

21

1.7

1.9

2.0

2.3

2.2

2.5

Target (NYSE:TGT)

35

6.6

6.9

6.2

6.7

7.3

7.4

Time Warner Cable (TWC)

24

5.8

6.2

6.5

6.9

7.2

7.6

Time Warner (NYSE:TWX)

37

NM

5.6

5.9

6.4

6.9

7.0

2. Consistently Increasing Dividends

Historical and Indicated dividends/share and current dividend yield:

Current

2008

2009

2010

2011

Indicated

Yield

Accenture

0.50

0.75

0.83

1.13

1.35

2.4%

CA Associates

0.16

0.16

0.16

0.19

0.25

3.7%

IBM

1.90

2.15

2.40

2.90

3.00

1.6%

Kroger

0.35

0.37

0.41

0.45

0.48

2.0%

McDonald's

1.63

2.05

2.26

2.53

2.80

2.8%

Novo Nordisk

0.88

1.03

1.41

1.82

2.50

1.8%

Stryker

0.25

0.40

0.63

0.72

0.84

1.6%

Target

0.60

0.66

0.84

1.10

1.20

2.3%

Time Warner Cable

NM

NM

1.60

1.92

2.24

3.0%

Time Warner

NM

NM

0.85

0.94

1.04

2.7%


3. Consistent History of Share Repurchases with Announced/Continued Repurchases

Historical data was calculated by looking at percent decline in fully diluted share counts. Future/indicated share repurchase is obviously subjective but was estimated by taking authorized share repurchase amount announced by each company and indicated timeframe to complete (if available) to get estimated dollar repurchase amount per year and then dividing by market cap.

Percent of Shares Repurchased/Year:

2008

2009

2010

2011

Indicated

Accenture

4.6%

4.5%

2.5%

3.1%

3.0%

CA Associates

4.9%

0.2%

1.3%

4.9%

5.0%

IBM

4.1%

3.6%

3.7%

6.2%

5.0%

Kroger

3.5%

5.6%

1.4%

1.8%

3.0%

McDonald's

5.0%

3.5%

2.7%

3.7%

3.5%

Novo Nordisk

2.5%

2.6%

3.1%

2.6%

3.0%

Stryker

0.9%

3.4%

0.0%

2.5%

3.0%

Target

2.0%

9.1%

2.4%

3.4%

5.0%

Time Warner Cable

NM

NM

NM

6.7%

6.0%

Time Warner

NM

NM

4.2%

7.8%

6.0%

4. Trading at Modest Multiple of 2012E EBITDA and Reasonable Range Relative to Latest Twelve Month High/Low

NVO trades at a high multiple of EBITDA although this appears to be justified by its growth rate. McDonald's is also a bit high but again justifiable. The rest are in single digits.

Three companies (CA, IBM and MCD) are trading near their latest twelve month highs and NVO is at its ltm high but otherwise all stocks are in a "reasonable" range currently, particularly given the run up in the market.

EBITDA

% Between

Multiple

LTM

(2012E)

High/Low

Accenture

7.7

x

59%

CA Associates

6.9

95%

IBM

8.9

94%

Kroger

5.2

50%

McDonald's

10.8

91%

Novo Nordisk

14.2

100%

Stryker

6.9

46%

Target

6.9

64%

Time Warner Cable

6.0

77%

Time Warner

7.4

85%

5. Favorably Viewed by Analyst Community and Trading at 5-10% Discount to Average Analyst Targeted Stock Price

Below is the average ranking by the analyst community (as provided by Marketwatch.com). All are rated as overweight. All but one trade below the average stock price targeted by analysts, and all but two (NVO and CA) trade at a 5%+ discount to the average stock price targeted by analysts.

Company

Average Rating

Discount to Target Price

Accenture

Overweight

8%

CA Associates

Overweight

3%

IBM

Overweight

5%

Kroger

Overweight

8%

McDonald's

Overweight

8%

Novo Nordisk

Overweight

-2%

Stryker

Overweight

15%

Target

Overweight

10%

Time Warner Cable

Overweight

15%

Time Warner

Overweight

13%

6. Total Cash Returned to Shareholders of 4.5% or More

Each company returns total cash (dividend yield plus share repurchase %) of 4.5% or more.

Dividend Yield +

Repurchase %

=

TOTAL

Accenture

2.4%

3.0%

5.4%

CA Associates

3.7%

5.0%

8.7%

IBM

1.6%

5.0%

6.6%

Kroger

2.0%

3.0%

5.0%

McDonald's

2.8%

3.5%

6.3%

Novo Nordisk

1.8%

3.0%

4.8%

Stryker

1.6%

3.0%

4.6%

Target

2.3%

5.0%

7.3%

Time Warner Cable

3.0%

6.0%

9.0%

Time Warner

2.7%

6.0%

8.7%

Summary

These yields, combined with these companies' consistent (albeit in many cases modest) growth and proven ability to withstand recessionary environments make them very good long term picks for income investors.

One final note. Although dividends are not guaranteed and at the discretion of the Board, they still tend to be very predictable as companies are loathe to reduce or eliminate them or keep anything other than a consistent dividend history. However, share repurchases are more fickle and can be reduced, eliminated or delayed much more easily than dividends. Just look at the historical share repurchase percentage table versus dividend table to see the inconsistency of share repurchases versus dividends. Still, all the companies in this report have consistently repurchased shares and it's a good bet they will continue to do so.

Disclosure: I am long ACN, CA, IBM, MCD, SYK, TGT, TWC, TWX, KR, NVO. I am long all of the stocks mentioned in this report but have no intention of adding to my positions in the next 72 hours.