Taking a deeper look at Share Buybacks

A buyback is when a company buys back its own stock.  As a company buys back shares, its future earnings, dividends and assets concentrate in the hands of an ever-shrinking shareholder base. 

These companies become more valuable by losing shareholders.  

Warren Buffett wrote in his 2000 letter to shareholders:

There is only one combination of facts that makes it advisable for a company to repurchase its shares:  

"First, the company has available funds - cash plus sensible borrowing capacity - beyond the near-term needs of the business, and, second, finds its stock selling in the market below its intrinsic value, conservatively calculated."

If those two requirements are met, Buffett is an enthusiastic supporter of stock buybacks.  When done right, buybacks can accelerate the compounding of returns.  When you find a company that drives its shares outstanding lower over time and seems to have a knack for buying at good prices, you should take a deeper look.

In a slow to no-growth economy, this tactic is becoming a more important driver of earnings-per-share growth.  But you have to actually shrink the number of shares outstanding.

Since 1998 to 2015, the 500 largest US companies have bought back about one-quarter of their shares in dollar value,, yet the actual shares outstanding grew.  This is because they hand out the shares in lavish incentive packages to greedy executives.

 Warning! : 

When evaluating share buybacks, make sure to look at actual shares outstanding. Relying on company news releases alone can be misleading. 

Companies also buy back shares 

• to support employee incentive programs or 
• to accumulate shares for an acquisition. 

Such repurchases may be okay but aren't the kind of repurchases that increase return on equity for remaining owners. 

Additional reading:

100 Baggers by Christopher Mayer (Foreword by KC Chong)

Capital Allocation by the Managers: Study their track record and their decision-making processes.

So you have bought a good company at a decent price.  You have completed the essential part of choosing your favourite stocks.

By definition, this company generates a lot of earnings and the managers have significant flexibility in terms of how they allocate this money, with a wide range off options available to them.  

It is important that the capacity to generate value through competitive advantages is also matched by an appropriate allocation of earned profit

Appropriate allocation of earned profit by the managers include:

1.  Shares buyback and cancellation of shares. #
2.  Dividends
3.  Investments in assets for growth.
4.  Acquisition of other companies to increase the company's competitive advantage.

The board should decide between these options based on the highest executed return and consequent value creation for the shareholder.

The only way you can get a fix on capital allocation is by studying the managers track record and the company's decision-making processes.  It comes down to both a quantitative and a qualitative analysis based on criteria, with experience being assigned a very high weight.

The greater the extent to which managers have shareholding interests, the more likely it is that their interest will be aligned with minority shareholders, but this step shouldn't be overlooked in any case.


# (The shareholders should ask of the management board that they give consideration to repurchasing and cancelling shares.  When you invested into the shares, you obviously believe the shares to be undervalued and this means that a cancellation would create value.  The management need not have to do it but this should be on their list.)

Share repurchases and subsequent cancellations.

Buffett has very clear ideas on share repurchases and subsequent cancellations.

Buybacks clearly make sense when

• there are no better alternative investment options and 
• the share is trading below the intrinsic or target business value.

The problem is that executives would rather increase company size via misplaced acquisitions,, leading to diworsification, diversifying to deteriorate, as Peter Lynch has wittily anointed it. 


Buffett believes that it only makes sense to use own shares to buy companies when you get more in return, which doesn't usually happen.

Don't use the PE ratio

The price to earnings ratio (PE) s the most commonly used valuation yardstick by investors.

It is very easy to calculate.

PE ratio = share price / earnings per share (EPS)


In simple terms, shares with high PE ratios are seen as being expensive whilst those with low ones are seen as being cheaper.

Despite its simplicity, PE ratio has many pitfalls that can give investors a misleading view of how cheap or expensive some share really are.

The PE ratio's drawbacks are all to do with the "E" or EPS, part of the calculation


1.  EPS is easy to manipulate.

Companies can boost EPS by changing accounting policies.

For example, they can extend the useful lives of fixed assets such as plant and machinery, which lowers the depreciation expense and boosts profits.

2.  EPS says nothing about the quality of profits.

It doesn't take into account whether profits have changed due to sales of existing products or services - the best source of profits growth - or whether the company has invested heavily in new assets or bought another company (acquisition).

Share buybacks boost EPS by shrinking the number of shares outstanding, even if profits are static or shrinking.  Buyback can be done when the shares are expensive.  By paying too much, a large chunk of shareholder value is destroyed; the cash spent is wasted.

3.  EPS may not resemble true cash profits.

Quite often a company's true cash profits are significantly more or less than its EPS (more often less).

4.  EPS may be based on profits that are unsustainably high or temporarily low.

This means that the PE ratio could be misleadingly low or high.  

This is a particular problem for cyclical companies.



Summary:

For the above reasons, EPS can be unreliable and you should not rely on PE alone.

Once again, PE has may pitfalls that can give investors a misleading view of how cheap or expensive some shares really are.

Capital Structure, Dividends and Share Repurchases

There is usually more to lose than to gain when making a decision in this area.

Managers should manage capital structure with the goal of not destroying value as opposed to trying to create value.

There are three components of a company's financial decisions:

1. how much to invest,
2. how much debt to have, and 
3. how much cash to return to shareholders.

Choices concerning capital structure

Managers have many choices concerning capital structure, for example,

1. using equity,
2. straight debt,
3. convertibles and
4. off-balance-sheet financing.

Managers can create value from using tools other than equity and straight debt under only a few conditions.

Even when using more exotic forms of financing like convertibles and preferred stock, fundamentally it is a choice between debt and equity.




Debt and Equity Financial Choices trade-offs

Managers must recognise the many trade-offs to both the firm and investors when choosing between debt and equity financing.

The firm increases risk but saves on taxes by using debt; however, investing in debt rather than equity probably increases the tax liability to investors.

Debt has been shown to impose a discipline on managers and discourage over investment, but it can also lead to business erosion and bankruptcy.

Higher debt increases the conflicts among the stakeholders.




Credit rating is a useful indicator of capital structure health

Most companies choose a capital structure that gives them a credit rating between BBB- and A+, which indicates these are effective ratings and capital structure does not have a large effect on value in most cases.

The capital structure can make a difference for companies at the far end of the coverage spectrum.

Credit ratings

• are a useful summary indicator of capital structure health and 
• are a means of communicating information to shareholders.

The two main determinants of credit ratings are

• size and 
• interest coverage.

Two important coverage ratios are

• the EBITA to interest ratio and 
• the debt to EBITA ratio.

The former is a short-term measure, and the latter is more useful for long-term planning.




Methods to manage capital structure

Managers must weight the benefits of managing capital structure against

• the costs of the choices and 
• the possible signals the choices send to investors.

Methods to manage capital structure include

• changing the dividends, 
• issuing and buying back equity, and
• issuing and paying off debt

When designing a long-term capital structure, the firm should

• project surpluses and deficits, 
• develop a target capital structure, and 
• decide on tactical measures.  

The tactical, short-term tools include

• changing the dividend,
• repurchasing shares, and 
• paying an extraordinary dividend.

How do you identify an exceptional company with a durable competitive advantage from the CASH FLOW STATEMENTS?

How do you identify an exceptional company with a durable competitive advantage?

Financial statements are where you can search for companies with a durable competitive advantage that is going to make one super rich.

CASH FLOW STATEMENTS

The cash flow statement keeps track of the actual cash that flows in and out of the business.

A company can have a lot of cash coming in, through the sale of shares or bonds and still not be profitable.

A company can be profitable with a lot of sales on credit and not a lot of cash coming in.

The cash flow statement will tell us if the company is bringing in more cash than it is spending (“positive cash flow”) or if it is spending more cash than it is bringing in (“negative cash flow”).

Cash flow statements like income statements cover a set period of time.

The cash flow statement has three sections:

·               Cash flow from operating activities

·              Cash flow from investing activities

·              Cash flow from financing activities

Cash flow from operating activities

Net income + depreciation & amortization = Total Cash from Operating Activities

Depreciation and amortization are real expenses from an accounting point of view.

They don't use up any cash because they represent cash that was spent years ago.

Cash flow from investing activities

This area includes an entry for all capital expenditures made for that accounting period.

Capital expenditure is always a negative number because it is an expenditure which causes a depletion of cash.

Total Other Investing Cash Flow Items adds up all the cash that gets expended and brought in, from the buying and selling of income producing assets.

If more cash is expended than is brought in, it is a negative number.

If more cash is brought in than is expended, it is a positive number.

Capital Expenditure + Other Investing Cash Flow Items = Total Cash from Investing Activities

Cash flow from financing activities

This measures the cash that flows in and out of a company because of financing activities.

This includes all outflows of cash for the payment of dividends.

It also includes the selling and buying of the company’s stock.

When the company sells shares to finance a new plant, cash flows into the company.

When the company buys back its shares, cash flows out of the company.

The same thing happens with bonds.

Sell a bond and cash flows in; buy back a bond and cash flows out.

Cash Dividends Paid + Issuance (Retirement) of Stock, Net + Issuance (Retirement) of Debt, Net  = Total Cash from Financing Activities

Net Change in Cash

Total Cash from Operating Activities + Total Cash from Investing Activities + Total Cash from Financing Activities = Net Change in Cash

Some of the information found on a company’s cash flow statement can be very useful in helping us determine whether or not the company in question is benefiting from having a durable competitive advantage.

Capital Expenditures

Capital expenditures are outlays of cash or the equivalent in assets that are more permanent in nature – held longer than a year – such as property, plant and equipment.

They also include expenditures for such intangibles as patents.

They are assets that are expensed over a period of time greater than a year through depreciation and amortization.

Capital expenditures are recorded on the cash flow statement under investment operations.

When it comes to making capital expenditures, not all companies are created equal.

Many companies must make huge capital expenditures just to stay in business.

If the capital expenditures remain high over a number of years, they can start to have deep impact on earnings.

As a rule, a company with durable competitive advantage uses a smaller portion of its earnings for capital expenditures for continuing operations than do those without a competitive advantage.

Coca Cola spent 19% of its last ten years total earnings for capital expenditure.  Moody spent 5% of its total earnings for the last ten years for capital expenditure.

GM used 444% more for capital expenditure than it earned over the last ten years.  Goodyear (tire maker) used 950% more for capital expenditure than it earned over the last ten years.

For GM and Goodyear, where did all that extra money come from?

It came from bank loans and from selling tons of new debt to the public.

Such actions add more debt to these companies’ balance sheets, which increases the amount of money they spend on interest payments and this is never a good thing.

Both Coke and Moody’s, however, have enough excess income to have stock buyback programs that reduce the number of shares outstanding, while at the same time either reducing long-term debt or keeping it low. 

Both these activities helped to identify the businesses with a durable competitive advantage working in their favour.

When looking at capital expenditures in relation to net earnings, add up a company’s total capital expenditures for a ten year period and compare the figure with the company’s total net earnings for the same ten year period.

The reason we look at a ten year period is that it gives us a really good long term perspective as to what is going on with the business.

Historically, durable competitive advantage companies used a far smaller percentage of their net income for capital expenditures.

If a company is historically using 50% of less of its annual net earnings for capital expenditures, it is a good place to look for a durable competitive advantage.

If it is consistently using less than 25% of its net earnings for capital expenditures, that scenario occurs more than likely because the company has a durable competitive advantage working in its favour.

Stock Buybacks

Companies that have a durable competitive advantage working in their favour make a ton of money.

The companies can sit on this cash, or they can reinvest it in the existing business or find a new business to invest in. 

If they don’t require the cash for the above, they can also either pay it out as dividends to their shareholders or use it to buy back shares.

Shareholders have to pay income tax on the dividends.  This doesn’t make anyone happy.

A neater trick is to use some of the excess money that the company is throwing off to buy back the company’s shares.

This reduces the number of outstanding shares – which increases the remaining shareholders’ interest in the company – and increases the per share earnings of the company, which eventually makes the stock price go up.

If the company buys back its own shares it can increase its per share earnings figure even though actual net earnings don’t increase.

The best part is that there is an increase in the shareholders’ wealth that they don’t have to pay taxes on until they sell their stock.

To find out if a company is buying back its shares, go to the cash flow statement and look under Cash from Investing Activities, under a heading titled “Issuance (Retirement) of Stock, Net”.

This entry nets out the selling and buying of the company’s shares.

If the company is buying back its shares year after year, it is a good bet that it is a durable competitive advantage that is generating all the extra cash that allows it to do so.

One of the indicators of the presence of a durable competitive advantage is a “history” of the company repurchasing or retiring its shares.

The Danger of Low Dividends

By Morgan House
April 25, 2013 

Earnings among S&P 500 companies are at an all-time high. By quite a bit, too: Operating earnings per share last year were more than 10% above the previous peak set in 2006, when the economy topped out before the recession.

Dividend payouts are also at an all-time high, but there is much less to be excited about here. Companies have been paying out a lower share of their earnings as dividends for decades, and the trend shows little sign of slowing. The dividend payout ratio is pitiful:

Source: Yale, author's calculations.

A lot of this decline over time is explained by companies using more of their free cash flow to repurchase shares. Benjamin Graham's classic 1949 book contains deep analysis and commentary on dividends, but scarcely a mention of share buybacks. That changed dramatically after the 1980s. Legg Masson has shown that from 1985 to 2011, S&P 500 dividends increased fourfold, but share buybacks increased 21-fold.  

The impact this shift has on how investors are compensated is deep. As Shawn Tully of CNNMoney pointed out earlier this year, the dividend yield on ExxonMobil (NYSE: XOM  ) is a little more than 2%, but the total yield including buybacks is north of 7%. Pfizer's (NYSE:PFE  ) dividend yields more than 3%, but with buybacks the company returns 7.6% to shareholders. Wal-Mart's (NYSE: WMT  ) total yield is about double its dividend yield.

There are mountains of evidence showing that, on average, investors are better off with dividends than share buybacks, as CEOs have a terrible history of buying back their shares at nosebleed prices.

But I think the damage of the shift toward buybacks may even be underrated. With interest rates at zero, investors have been clamoring for yield wherever they can find it. For years, that's been stocks with high dividends, whose prices have been pushed to record levels and yields down to near record lows. Shares of Verizon (NYSE: VZ  ) now yield less than 4% and Altria Group (NYSE: MO  ) , less than 5%.

These are still healthy yields, particularly compared with fixed-income alternatives -- and both companies have high dividend payout ratios. But I can't help but wonder whether companies favoring buybacks over dividends will ultimately be a disservice to companies with high dividends. The lack of yield among most stocks drives up valuations at companies that still do provide reasonable payouts, and high current valuations will eat into future returns.

Managers typically cite the desire to "enhance shareholder value" when announcing share buybacks. But never underestimate the power of unintended consequences. 

http://www.fool.com/investing/general/2013/04/25/the-danger-of-low-dividends.aspx

Words of Wisdom on Dividend Policy From Big Tesco Backer Warren Buffett

By G. A. Chester 

March 7, 2013 

TSCO.LTesco

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+ Watch TSCO.L

If you're a U.K. investor just starting out, U.S. investing legend Buffett may be new to you -- perhaps your interest in the man has been piqued by reading about how he's taken a big stake in Tesco  (LSE: TSCO  ) (NASDAQOTH:TSCDY  ) .LONDON -- Last week, Berkshire Hathaway  (NYSE: BRK-A  ) (NYSE: BRK-B  ) boss Warren Buffett released his annual letter to shareholders.

I can tell you that Buffett's annual letters never fail to educate, amuse, and enrich. You'll find abundant pearls of wisdom in his witty, colourful, and incisive commentaries -- as, indeed, will old hands.

586,817% and countingLet's start with why Buffett has captured the attention of millions of investors around the world. The bottom line is, his Berkshire Hathaway group has an outstanding record of increasing shareholder value over the best part of five decades.

Between 1965 and 2012, Berkshire's book value per share has increased by a mind-boggling 586,817%, representing a compound annual growth rate of close to 20%. Such gains over such a long period are unparalleled.

Successful businessesBuffett's strategy of wealth creation for Berkshire is something ordinary investors like us can learn from in weighing up companies we may want to invest in.

Successful businesses generate cash. Buffett is clear about what a company should do with that cash, in the following order of priority:

• First, examine reinvestment possibilities offered by its current business for increasing the competitive advantage over rivals.
• Second, look at acquisitions that are likely to make shareholders wealthier on a per-share basis than they were prior to the acquisition.
• Third, consider repurchasing the company's own shares to enhance each investor's share of future earnings.
• Fourth, by default, pay dividends to shareholders.

Reinvestment and acquisitionsBy reinvestment in the business, Buffett is referring to spending on projects "to become more efficient, expand territorially, extend and improve product lines or to otherwise widen the economic moat separating the company from its competitors."

When we, ourselves, are considering companies to invest in, we can check how intelligently management is reinvesting in the business by looking at such things as whether market share is being maintained/increased, and whether margins are being maintained/grown relative to rivals.

Buffett considers small bolt-on acquisitions that can easily be integrated into existing operations as part of the reinvestment in the business. The acquisitions referred to in stage two of his four steps are those that add something new to the company -- some form of diversification.

When we are considering companies to invest in, we can check whether management has a good track record of adding shareholder value through making such acquisitions.

Repurchasing sharesBuffett is strict about when it's right for a company to repurchase its own shares. Again and again over the years, he has stressed that the only time to do share buybacks is when the shares are available "far below," "well below," or "at a meaningful discount from" intrinsic value -- and "conservatively calculated" intrinsic value at that.

Last year, Berkshire spent $1.3bn repurchasing its own shares. At the moment, Buffett is prepared to pay up to 120% of Berkshire's book value for the shares.

So, if you're interested in buying shares in Berkshire yourself, you have it from the horse's mouth that 120% of book value represents a meaningful discount to conservatively calculated intrinsic value at the present time.

DividendsBerkshire doesn't pay dividends, but not because Buffett is against them per se. It's simply that he has always seen opportunities in steps one to three for employing Berkshire's cash flows more fruitfully for shareholders.

At the moment, the discount to intrinsic value is such that share buybacks are an efficient way for Berkshire to employ excess cash, but Buffett says that if things change materially "we will re-examine our actions."

Buffett is perfectly happy for the quoted companies in Berkshire's portfolio -- American Express, Coca-Cola, IBM, and Wells Fargo are his "Big Four" -- to use excess cash to make share repurchases "at appropriate prices," or to otherwise pay him dividends. He says: "We applaud their actions and hope they continue on their present paths."

Buffett no doubt feels the same about his big U.K. investment in Tesco, whose shares -- at 380p -- are currently trading on an historically low earnings multiple, and offer investors a healthy 4% dividend yield.

Berkshire's 415,510,889 shareholding in Tesco (5.2% of the company) should net Buffett a dividend payout of something over £60m this year alone.

http://www.fool.com/investing/international/2013/03/07/words-of-wisdom-from-big-tesco-backer-warren-buffe.aspx

Evaluating a Company - 10 Simple Rules

Having identified the company of interest and assembled the financial information, do the following analysis.

1.  Does the company have any identifiable consumer monopolies or brand-name products, or do they sell a commodity-type product?

2.  Do you understand how the company works?  Do you have intimate knowledge of, and experience with using the product or services of the company?

3.  Is the company conservatively financed?

4.  Are the earnings of the company strong and do they show an upward trend?

5.  Does the company allocate capital only to those businesses within its realm of expertise?

6.  Does the company buy back its own shares?  This is a sign that management utilizes capital to increase shareholder value when it is possible.

7.  Does the management spent the retained earnings of the company to increase the per share earnings, and, therefore, shareholders' value? That is, the management generates a good return on retained equities.

8.  Is the company's return on equity (ROE) above average?

9.  Is the company free to adjust prices to inflation?  The ability to adjust its prices to inflation without running the risk of losing sales, indicates pricing power.

10.  Do operations require large capital expenditures to constantly update the company's plant and equipment?   The company with low capital expenditures means that when it makes money, it doesn't have to go out and spend it on research and development or major costs for upgrading plant and equipment.


Once you have identified a company as one of the kinds of businesses you wish to be in, you still have to calculate if the market price for the stock will allow you a return equal to or better than your target return or your other options.  Let the market price determine the buy decision.  

Share Buybacks - What the Board of Directors can choose to do with these?

Upon the purchase by the Company of its own Shares, the Board of Directors of the Company can choose to:-

(i) cancel all or part of the Shares purchased; and/or
(ii) retain all or part of the Purchased Shares as treasury shares; and/or
(iii) distribute the treasury shares as share dividends to the Company’s shareholders for the time being; and/or
(iv) resell the treasury shares on Bursa Securities.

Share Buybacks: A Buy Signal You Can’t Ignore

Alexander Green, Tuesday, March 13th, 2012

Your Money >>>

Share Buybacks: A Buy Signal You Can’t Ignore

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…But you shouldn’t overlook another excellent indicator: share buybacks.


According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.


Is this a good thing? Absolutely.
Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxabledividends.


So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.


Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)


But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.


More buybacks ahead
Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM),Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise or cash flow decreases, a repurchase program may never get completed.


The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.


But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips(NYSE: COP).


Having your cake and eating it, too…
Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree.


But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.


Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).These are the kind of companies that should handily outperform the market in the months ahead.

Share Buybacks: A Buy Signal You Can’t Ignore

Alexander Green, Tuesday, March 13th, 2012

Your Money >>>

Share Buybacks: A Buy Signal You Can’t Ignore

There are a number of signals that bode well for price appreciation with individual stocks: growing market share, rising sales, strong earnings growth and improving margins…But you shouldn’t overlook another excellent indicator: share buybacks.


According to Standard & Poor’s, U.S. public companies spent at least $437 billion last year buying their own shares back. That was 46% more than in 2010.


Is this a good thing? Absolutely.
Regardless of whether you’re an individual or a corporation, sitting on cash isn’t terribly rewarding these days with the average money market fund paying five one-hundredths of 1%. And if the outlook is uncertain, a business owner doesn’t want to commit to building new facilities or taking on employees that aren’t needed. Nor is it necessarily in the best interest of shareholders to distribute this cash in the form of taxabledividends.


So buying back shares often makes good sense. Why? Because when you divide net income into a smaller number of shares outstanding, you get greater growth in earnings per share. And, ultimately, that’s what drives share prices higher.


Of course, stock buybacks boost earnings per share only if they’re larger than stock issuance. Historically, that hasn’t always been the case. (Much executive compensation today comes in the form of stock options that have a dilutive effect on existing shareholders.)


But in recent quarters, the supply of shares outstanding has been shrinking. And, according to analyst Howard Silverblatt at Standard & Poor’s, during the current earnings season, 97 of the S&P 500 enjoyed a boost to earnings per share of at least 4% from repurchases alone.


More buybacks ahead
Expect to see more of these buyback announcements in the weeks ahead. Why? Because U.S. corporations are sitting on more than $2 trillion in cash. That’s enough to buy all of ExxonMobil (NYSE: XOM),Microsoft (Nasdaq: MSFT) and IBM (NYSE: IBM).

There are some caveats, however. Some companies announce their intention to buy back shares and then don’t follow through. If business conditions change, interest rates rise or cash flow decreases, a repurchase program may never get completed.


The other thing to watch is the exercise of stock options, as mentioned above. If a company is only buying back enough shares to offset the dilution that occurs when executives exercise stock options, you won’t see the buyback boost earnings per share.


But, generally speaking, share repurchase programs are a decided positive. And right now, with money cheap and corporate earnings strong, buybacks are occurring at record levels. Attractive companies in the midst of major share buybacks right now include L-3 Communications (NYSE: LLL) and ConocoPhillips(NYSE: COP).


Having your cake and eating it, too…
Of course, some analysts would rather see corporate executives buying shares with their own money rather than the company’s money. And I don’t disagree.


But sometimes you can have your cake and eat it too. In a recent study, stocks that were subject to repurchases but not insider buying beat other stocks by nearly nine percentage points over four years. But stocks that were the subject of both repurchases and insider buying beat others by a whopping 29 points over four years.


Which companies have enjoyed share buybacks and insider buying recently? Two of them are Boston Scientific (NYSE: BSX) and Bank of New York Mellon (NYSE: BK).These are the kind of companies that should handily outperform the market in the months ahead.