GuruFocus discusses why company share buybacks are positive. The rate of share buybacks is combined with Guru Buys and Insider Buys into the Triple Buys tool for the selection of best ideas.
As we enter the second month of the second quarter, most of the gurus will report their portfolios during the first quarter in two weeks. GuruFocus watches the buys, sells and portfolios of the best Gurus in the world, hoping to find the best ideas they have uncovered lately. In aggregation, Gurus own more than 1000 stocks and make purchases on around 100 stocks each quarter. On average, these stocks perform well, but they are still too many for most of us to own. In order to filter down to the best ideas, we have added other criteria for idea screening. One of them is companies’ stock buybacks.
Why are buybacks positive? Companies buy back their own shares for a few reasons: 1. A company believes its shares are cheap and attractively priced. 2. A company feels the best investment it can make relative to other alternatives (such as an acquisition) is its own stock. 3. By reducing share count, a company may increase its reported earnings.
Warren Buffett once said, “When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” If a company can support a meaningful share buyback program with its own cash, the company most likely has a strong balance sheet and is confident in its earnings and cash flow going forward.
As expected, the higher the percentage of the buyback, the greater the potential for shareholder rewards. Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
Unfortunately, there is a difference between announcing a buyback and actually purchasing the stock. A buyback announcement may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived. Studies also found that good portion of announced buybacks are not executed in full.
In order to find out the companies that have really been buying back their shares, we have studied the change of the number of total shares outstanding of the companies in our database over the past 3 years, and use actual average annual rate of share reduction as the criteria of share buybacks.
Only a handful of companies buy back their shares at more than 10% a year on average during the past 3 years. About 50 companies have an average annual share reduction rate of more than 5%. The rate of share buybacks is combined with Guru Buys and Insider Buys into the Triple Buys tool for the selection of best ideas.
Premium Members can browse through the companies that buyback their shares at http://www.gurufocus.com/InsiderBuy.php?guru_min=0&insider_mini=0&buyback=1&position=triple. You can also use Triple Buys Screener to find out the stocks that Gurus buy, Insiders buy and companies are buying back. If you are not a premium Member, we invite you for a 7-Day FREE Trial.
As we enter the second month of the second quarter, most of the gurus will report their portfolios during the first quarter in two weeks. GuruFocus watches the buys, sells and portfolios of the best Gurus in the world, hoping to find the best ideas they have uncovered lately. In aggregation, Gurus own more than 1000 stocks and make purchases on around 100 stocks each quarter. On average, these stocks perform well, but they are still too many for most of us to own. In order to filter down to the best ideas, we have added other criteria for idea screening. One of them is companies’ stock buybacks.
Why are buybacks positive? Companies buy back their own shares for a few reasons: 1. A company believes its shares are cheap and attractively priced. 2. A company feels the best investment it can make relative to other alternatives (such as an acquisition) is its own stock. 3. By reducing share count, a company may increase its reported earnings.
Warren Buffett once said, “When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.” If a company can support a meaningful share buyback program with its own cash, the company most likely has a strong balance sheet and is confident in its earnings and cash flow going forward.
As expected, the higher the percentage of the buyback, the greater the potential for shareholder rewards. Studies found that the stocks of the companies that buy back 5-10% of their total shares on average gain 6.8% more than the companies that do not buy back shares. Dilutions from the increases in the number of shares outstanding result in poorer stock performance over long term.
Unfortunately, there is a difference between announcing a buyback and actually purchasing the stock. A buyback announcement may initially boost the price of a stock, but this phenomenon (when it occurs) is usually short lived. Studies also found that good portion of announced buybacks are not executed in full.
In order to find out the companies that have really been buying back their shares, we have studied the change of the number of total shares outstanding of the companies in our database over the past 3 years, and use actual average annual rate of share reduction as the criteria of share buybacks.
Only a handful of companies buy back their shares at more than 10% a year on average during the past 3 years. About 50 companies have an average annual share reduction rate of more than 5%. The rate of share buybacks is combined with Guru Buys and Insider Buys into the Triple Buys tool for the selection of best ideas.
Premium Members can browse through the companies that buyback their shares at http://www.gurufocus.com/InsiderBuy.php?guru_min=0&insider_mini=0&buyback=1&position=triple. You can also use Triple Buys Screener to find out the stocks that Gurus buy, Insiders buy and companies are buying back. If you are not a premium Member, we invite you for a 7-Day FREE Trial.
