It is a good idea to keep an eye on companies buying back their own stock. Buybacks are the opposite of dilution. Rather, companies are concentrating their equity so there is more for the remaining shareholders.
Using the GuruFocus All-in-One Screener, I regularly run a screen to see who is buying stock. A number of mega caps showed up on the latest screen. The table below shows the buyback ratio over various time periods.
The buyback ratio is the proportion of stock the company has bought back per year over the time period. For example, the three-year buyback ratio is the average share buyback rate of the company over the past three years. A negative number means the company might be issuing new shares. A positive number indicates the company is buying back shares.
| Ticker | Company | CurrentPrice | Market Cap($M) | 1-Year Share Buyback Ratio | 3-Year Share Buyback Ratio | 5-Year Share Buyback Ratio | 10-Year Share Buyback Ratio | Dividend Yield % | Shareholder Yield % |
| (BAC, Financial) | Bank of America Corp. | $43.73 | 352,676.10 | 6.6 | 5.8 | 4.8 | 2.6 | 1.85 | 7.65 |
| (ORCL, Financial) | Oracle Corp. | $81.73 | 218,068.47 | 7.8 | 11 | 8.2 | 5.4 | 1.57 | 12.57 |
| (WFC, Financial) | Wells Fargo & Co. | $52.56 | 199,811.50 | 6.2 | 5.3 | 5.2 | 3.1 | 1.43 | 6.73 |
| (AXP, Financial) | American Express Co. | $190.28 | 144,096.93 | 5.5 | 3.5 | 3.1 | 4.2 | 0.9 | 4.4 |
| (LOW, Financial) | Lowe's Companies Inc. | $212.92 | 140,859.63 | 8.3 | 5.8 | 5.5 | 5.4 | 1.41 | 7.21 |
| (RIO, Financial) | Rio Tinto PLC | $79.52 | 128,856.25 | 22.9 | 0.8 | -0.2 | 0.7 | 9.97 | 10.77 |
| (CHTR, Financial) | Charter Communications Inc. | $558.26 | 106,902.71 | 10.8 | 8.5 | 8 | -10.5 | 0 | 8.5 |
| (TGT, Financial) | Target Corp. | $218.61 | 101,089.22 | 5.9 | 3.1 | 3.1 | 3.6 | 1.55 | 4.65 |
Income investors often focus on dividend yield, but they should also keep share buybacks in mind as they can add substantially to shareholder returns. They are as valid a way to return money to shareholders as dividends. Look at it this way: If a company has 10 shares outstanding and it buys back one share from the market, there are nine left. Suddenly, the shares are 10% more valuable.
Keep in mind, however, that buybacks are usually not as consistent and regular as dividends. But which is the better, stock buybacks or dividends? The main difference between dividends and buybacks is that a dividend payment represents a definite return in the current timeframe that will be taxed, whereas a buyback represents an uncertain future return on which tax is deferred until the shares are sold. However, since capital used in buybacks remains within the equity of the company, it continues to compound at the book value-adjusted return on equity. In the case of Bank of America (BAC, Financial), for instance, this would be about 7.76%.
I like to add the three-year share buyback ratio to the dividend yield to get my preferred metric of shareholder yield as in the table above. Looking at Bank of America, the shareholder yield is 7.65%. This indicates the company is putting $7.65 of cash per year in my pocket for every $100 I invest in the company. Pretty darn good I say. Of course, unlike the dividend, the buyback is not paid in cash, but is instead reflected in the increased value of the shares. Bank of America's stock has done pretty well over past three years as part of its capital gains have come from buybacks.
Charter Communications (CHTR, Financial), the second-largest cable company in the U.S., also has a high buyback rate of 8.5%. It does not pay a dividend, so it may be off the radar of many dividend investors. This is a mistake, in my opinion. Charter is great at returning value to shareholders via buybacks. The stock has performed admirably over the years.
Conclusion
There is more to shareholder returns than dividends. Investors should also be looking at buybacks as they demonstrate management's confidence in their own company (eating one's own cooking, and all that jazz).
Of course, since most management teams are awarded stock options, buybacks benefit them directly. In addition, management may be getting bonuses for increasing earnings per share. By concentrating outstanding shares, employee stock options increase in value and earnings per share rises.
As a result, an independent board of directors needs to keep a close eye on management to ensure they are not overly lining their own pockets to the detriment of long-term growth. Buybacks make more sense if the stock is undervalued, so the board of directors is responsible for supervising buybacks so they are benefiting the company and shareholders over the long term. Fundamentally, buybacks are a capital allocation decision like dividends, debt repayments, an acquisition or an expansion project.
