Monday, February 10, 2014

Five Dividend Paying Companies with Consistent Share Buybacks

In a previous article I discussed the positive and negative sides of stock buybacks. In general, I am interested in dividends paid to me in cash, rather than the potential for a capital gain that share buybacks might deliver. The issue with buybacks is that managements quite often have terrible timing with execution of programs. For example, when times are good and companies are flush with cash, managements start repurchasing stock at high prices. However, when times are bad, managements conserve cash and not only fail to take advantage of repurchasing stock at depressed values, but might even issue more stock to bolster liquidity. General Electric (GE) is a prime example of this phenomenon, as it spent billions repurchasing stock at prices between $35- $39/share prior to the financial crisis, only to sell half a billion shares at $22 when things got tough. This is not an example of intelligent capital allocation.

However, if management can consistently buy out other shareholders at attractive prices, and buybacks don’t mask the eroding effects of share compensation, I can view them somewhat favorably. I am particularly favorable towards companies which consistently perform share buybacks, and do not overpay for those shares. I went through the list of the top 20 buybacks for the past three years, and identified several companies which have managed to repurchase a significant amount of stock each year for the past five years.


Exxon Mobil Corporation (XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products. The company has raised dividends for 31 years in a row. Over the past decade, this dividend champion has managed to increase dividends by 9.60%/year. Currently, Exxon Mobil trades at 12.20 times earnings and yields 2.70%. Check my analysis of Exxon Mobil.

International Business Machines Corporation (IBM) provides information technology products and services worldwide. The company has raised dividends for 18 years in a row. Over the past decade, this dividend achiever has managed to increase dividends by 19.40%/year. Currently, IBM trades at 11.70 times earnings and yields 2.20%. Check my analysis of IBM.

Wal-Mart Stores, Inc.(WMT) operates retail stores in various formats worldwide. The company has raised dividends for 39 years in a row. Over the past decade, this dividend champion has managed to increase dividends by 18%/year. Currently, Wal-Mart trades at 14 times earnings and yields 2.60%. Check my analysis of Wal-Mart.

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has raised dividends for 5 years in a row. Quarterly dividends increased from 46 cents/share in 2008 to 94 cents/share by the end of 2013. Currently, Philip Morris International  trades at 14.80 times earnings and yields 4.80%. Check my analysis of Philip Morris International.

Microsoft Corporation (MSFT) develops, licenses, and supports software, services, and hardware devices worldwide. The company has raised dividends for 11 years in a row. Over the past decade, this dividend achiever has managed to increase dividends by 15%/year. Currently, Microsoft trades at 13.40 times earnings and yields 3%. Check my analysis of Microsoft.

These companies also return profits to shareholders through regular dividend increases as well. In general, I view those managements as some of the most shareholder friendly ones in the US. This is because they are able to grow underlying profits through careful capital allocation, and only accepting projects that have a high likelihood of hitting internal rates of return. These cash machines then shower shareholders with more cash in the form of dividends, and buy out weak hands in the share buyback process as well.

When companies reduce number of shares outstanding, this also reduces the total amount of cash they need to pay to shareholders. Therefore, if total amounts spent on buybacks and dividends stay constant each year, this would lead to an almost automatic dividend increase for the limited partners in those consistent share repurchasers. If companies also manage to boost net income over time, stock buybacks can essentially turbocharge earnings per share growth.

Now, there are probably more companies with consistent buybacks out there as well. However, I only focused on the largest ones for 2011, 2012 and 2013, and made sure that these were not one time events. I would still prefer a bird in the hand through a cash dividend payment however, although I am not opposed to managements who consistently buy out other shareholders, thus making my shares more valuable in the process. The important thing is for these managements to avoid overpaying for these shares, which is a very rare thing in corporate America.

Full Disclosure: Long XOM, IBM, PM, WMT

Relevant Articles:

The Security I Like Best: Philip Morris International
Dividends versus Share Buybacks/Stock repurchases
Dividend Achievers Offer Income Growth and Capital Appreciation Potential
Dividend Champions Index – Five Year Total Return Performance

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