This article was published in the April issue of Money magazine.
Investors often cheer when businesses aggressively purchase their own stock, as is the case today. Not only do buybacks boost earnings per share by reducing the number of shares outstanding, but they're also a sign of confidence. If a CEO thinks his stock is worth buying, shouldn't you?
Often the answer is yes. Consider that the PowerShares Buyback Achievers ETF (PKW) has returned 19% annually over the past three years, beating the S&P 500 by more than five points a year.
Not all repurchases, though, are well timed. A Credit Suisse study found that companies tend to go on buyback sprees in frothy times, like 2007, while cutting back at market lows, like 2009. Businesses trading at exorbitant valuations probably shouldn't be deploying cash to boost already pricey shares since there are better (and cheaper) uses for those resources.
With that in mind, I screened for buybacks of solid firms that trade at low price/earnings ratios relative to their peers. I also focused on dividend payers with low debt, signs of sound management. Here are three that made the cut:
Southwest Airlines (LUV)
This discount carrier knows a little something about a deal. Last year, Southwest bought nearly 40 million shares and lowered its share count by about 5%, notes Todd Smurl, manager of the Patriot Fund. But Smurl, whose fund owns the stock, notes that there's also a growth story here.
The company's recent purchase of AirTran now gives it international exposure: Southwest will soon start flights to the Caribbean. The airline is also set to gain slots in Washington, D.C.'s Reagan airport, after recently entering New York's LaGuardia Airport, Boston, and Minneapolis--St. Paul.
What's so impressive isn't that this conglomerate gulped $5.2 billion of its shares last year. 3M did so while still boosting R&D, says Brian Clancy, co-manager of Davidson Multi-Cap Equity, which owns the stock.
Clancy says 3M doesn't get enough credit for its lucrative health care, industrial, and renewable-energy businesses. This company is much more than Post-it notes and Scotch tape, he says.
CEO Larry Ellison transformed this database giant by buying up a myriad of other software businesses. Yet Oracle has also been a consistent purchaser of its own stock.
And unlike many tech companies that announce buybacks just to offset new shares issued via mergers, employee option grants, and executive bonus programs, Oracle has actually been reducing its share count -- by 5% in the first six months of this fiscal year. This, at a time when the stock trades at a discount to the S&P 500 and the tech sector. You don't need a computer program to tell you that's a deal.
It might be best to keep business and personal separate, at least for two married couples in California.
The Securities and Exchange Commission settled insider trading charges with two men in unrelated cases Monday for acting on confidential information gleaned from overhearing their wives' business calls.
Related: SAC Capital's Martoma found guilty
In one case, the SEC alleges that Tyrone Hawk of Los Gatos, California snooped on work calls made by his wife, a finance manager at Oracle, related to MOREJesse Solomon - Mar 31, 2014 4:30 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.
The U.S. dollar is looking pretty strong lately, compared to the yen and the euro. While that might sound like great news, it could actually put the market rally in jeopardy.
Corporate profits could take a MOREPaul R. La Monica - Mar 21, 2013 12:59 PM ET
Death. Taxes. Oracle's Larry Ellison buying another company.
Oracle (ORCL) continued its acquisitive ways, announcing Monday that it was buying networking equipment company Acme Packet (APKT) for $1.7 billion.
Want to read a list of all the companies Oracle has purchased since it first launched a hostile offer for PeopleSoft back in 2003? It might take you longer to get through than the Super Bowl lasted.
Ellison has gone on a shopping spree MOREPaul R. La Monica - Feb 4, 2013 12:25 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Apple (AAPL) has more than $120 billion in cash. Microsoft (MSFT) is sitting on $66.6 billion. And Cisco Systems (CSCO) has $45 billion in "caysh." So will any of these firms join the latest craze that's MOREPaul R. La Monica - Dec 4, 2012 1:25 PM ET
Share of Workday soared 74% as they made their stock market debut on the New York Stock Exchange.
The company provides a cloud-based software for companies to manage human resources functions like payrolls, time tracking and employee expense management. It raised $637 million in its initial public offering after pricing 22.8 million shares at $28 a piece, $2 above the high end of its estimated range. That makes it the largest MOREHibah Yousuf - Oct 12, 2012 5:40 PM ET
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