Ask What Your Company Can Do For You

2/14/2011


Legally, holders of common stock own a piece of a company. In theory, that entitles them to a slice of the company's profits. In practice, companies reinvest most of that money, and the benefits of ownership accrue mostly in the form of price appreciation.

Through capital gains, companies indirectly share their success with shareholders. However, some companies take the concept of profit-sharing more literally, paying dividends and repurchasing shares. The benefits of dividends require no explanation — cash is a universal language.

Share buybacks don't offer the tangible feel of dividends, but they benefit investors by reducing the number of shares available. Profits are most commonly discussed on a per-share basis, and a decline in the number of shares will boost per-share growth. Consider IBM ($166; IBM), which generated net income of $5.26 billion in the December quarter, up 9% from year-earlier numbers. Because IBM repurchased enough stock to reduce its share count by more than 6% last year, its per-share profits rose 16%.

Both dividends and buybacks are on the rebound. In the December quarter, S&P 500 Index companies paid nearly $55 billion in dividends, the highest quarterly total in two years. For the year, total payments rose 4.5% to nearly $206 billion, still about $40 billion below levels seen in 2007 and 2008.

Share-buyback trends paint an even more optimistic picture. In their last four quarters, S&P 500 Index components spent $207.5 billion more buying back shares than they collected by issuing new shares. During the same period a year earlier, they repurchased $113.3 billion more than they issued. However, net buybacks topped $430 billion three years earlier. If the economy continues to expand and corporate profits rise, buybacks should continue to increase over the next year or two.

SECTOR ANALYSIS
Within the S&P 500 Index, six of the 10 market sectors delivered higher net stock buybacks over the last four quarters than in the year-earlier period. Net buybacks represent spending on share repurchases, minus the proceeds from share issuance. Financial buybacks have fluctuated widely, reflecting bailout-related share issuance in 2008 and huge repurchases in 2009.
--- Net Stock Purchase (Billions) ---
Last
Year
($)
1-Year
Ago
($
Year-Over-Year
Change
($)
% of Index
Dividends
in 2010
Consumer Discretionary
31.1
7.3
23.8
8
Consumer Staples
36.9
11.2
25.7
17
Energy
7.7
16.6
(8.8)
12
Financials
15.4
43.2
(27.7)
9
Health Care
36.3
15.9
20.4
13
Industrials
18.1
4.7
13.4
12
Materials
1.5
(11.3)
12.8
4
Technology
54.4
17.4
37.0
9
Telecommunications
0.1
0.2
(0.1)
9
Utilities
5.8
8.2
(2.3)
8

The financial sector's net buybacks declined more than $27 billion last year after jumping more than $100 billion the year before. Many financials issued massive numbers of shares in late 2008 as part of the bailout, then repurchased many of those shares in 2009.

Listed in the table below are 20 companies that share generously with stockholders. Most have increased spending on dividends and buybacks over the last year, and all 20 offer a shareholder yield (sum of dividend yield and repurchase yield) of at least 6%. For example, Advance Auto Parts ($65; AAP) has a dividend yield of 0.4% and a repurchase yield (net buybacks over the last 12 months divided by current stock-market value) of 8.9%, which sum to a shareholder yield of 9.3%. Three companies that give back are reviewed below.

Hewlett-Packard's ($48; HPQ) new CEO, Leo Apotheker, vowed to reverse many of the pay cuts made during Mark Hurd's tenure and recast the technology giant as a leading player in software. But the company appears poised to hold its recent course in regard to sharing profits with shareholders.

Net of new-stock issuance, H-P returned more than $9 billion to investors through dividends and stock buybacks in fiscal 2010 ended October. H-P is conservative with its dividend, initiated in 1965 and last raised in 1998. Not so with stock repurchases, which have shrunk the share count in each of the past 20 quarters — by a total of 21%. During that stretch, dating back to October 2005, the share price has appreciated by 72%. In December, H-P said it planned to actively repurchase stock this year, stressing once again that it prefers this strategy to dividend growth. At the end of October, the company was approved to spend $10.9 billion on buybacks, enough to repurchase about 10% of outstanding shares.

H-P shares appear cheap at 16 times trailing free cash flow, a 13% discount to computer-hardware stocks in the S&P 1500 Index. At 11 times trailing earnings, the stock trades 31% below its five-year average and 36% below its peer-group average. H-P, which was slated to release its Palm tablet computer Feb. 9, is a Buy and Long-Term Buy.


Rogers Communications' ($35; RCI) dividend, raised 10% in February 2010, equates to a plump 3.6% yield. In addition, the share count has dropped 7% in the past year. Like many cable-television and telecom companies, Rogers carries a heavy debt load. But it still enjoys plenty of liquidity, generating more than $3.6 billion in cash from operations in the year ended September.

A Toronto-based media giant, Rogers controls about 30% of Canada's cable-TV market. It has also carved out a 37% share of the Canadian wireless market. Canada has a low penetration rate for wireless services — just 70%, versus 95% in the U.S. Within the wireless market, Rogers has taken a 50% slice of smartphones and appears to be adding subscribers at a faster rate than competitors. Smartphone customers generate nearly double the average revenue per user (ARPU) of the typical voice subscriber.

Rogers plans to announce December-quarter results Feb. 16. Wall-Street projects earnings of $0.68 per share, up 11% on 3% higher revenue. Rogers is a Buy and a Long-Term Buy.


Wal-Mart Stores ($56; WMT) has provided investors with 37 straight years of higher dividends, including an 11% hike in March. The discounter raised its quarterly dividend at an annualized rate of 16% over the last five years, well above the growth rate for sales or operating profits. Stock buybacks have reduced the share count by 6% in the past year.

With U.S. sales growth waning, Wal-Mart finds itself at an inflection point. Price reductions no longer generate incremental sales growth, suggesting Wal-Mart has come closer to saturating the market for price-driven consumers — and failed to attract new customers who value things other than price.

Wal-Mart plans to keep capital spending for fiscal 2012 in line with 2011 levels in all areas except the international business, where expenditures could rise 12% to 14%. In the four years ended January 2010, Wal-Mart boosted its international square footage more than 60%, versus a 21% increase in the U.S. In the year ahead, Wal-Mart will look to push deeper into Canada and accelerate store openings in Brazil. It is also reportedly exploring the Philippines market. Wal-Mart continues to expand its online business, launching multiple Web sites in China and Latin America in the past couple months. Wal-Mart, yielding 2.1%, is a Long-Term Buy.

STOCKS THAT GIVE BACK
The 20 A-rated stocks below all boast a shareholder yield of at least 6%. Shareholder yield is the sum of the dividend yield and the repurchase yield (net share buybacks over the last 12 months divided by stock-market value). For example: Travelers ($58; TRV) has a dividend yield of 2.5% and a repurchase yield of 17.6%, which sum to a shareholder yield of 20.1%. Stocks recommended for purchase are presented in bold.
Dividends
--- (Millions) ---
Net Share
------ Buybacks ------
Repur-
chase
Yield
(%)
Share Count
--- (Millions) ---
Share-
holder
Yield
(%)
Company (Price; Ticker)
Last 4
Qtrs.
($)
12-Mo.
Chg.
(%)
Per-Share
Dividend
($)
Div.
Yield
(%)
Last 4
Qtrs.
($)
1 Year
Earlier
($)
Last
Qtr.
12-Mo.
Chg.
(%)
Sector
Advance Auto Parts
($65; AAP)
21
(8)
0.24
0.4
492
17
8.9
85
(11)
9.3
Consumer
Discretionary
Biogen Idec
($66; BIIB)
0
NM
0.00
0.0
2,676
703
16.7
243
(15)
16.7
Health Care
ConocoPhillips
($72; COP)
3,175
12
2.20
3.1
3,733
(13)
3.5
1,466
(3)
6.6
Energy
CSX ($71; CSX)
372
8
1.04
1.5
1,452
(34)
5.5
376
(5)
6.9
Industrials
DirecTV ($43; DTV)
0
NM
0.00
0.0
3,640
3,119
9.7
868
(11)
9.7
Consumer
Discretionary
Gilead Sciences
($39; GILD)
0
NM
0.00
0.0
3,420
1,279
10.7
824
(11)
10.7
Health Care
Hewlett-Packard
($48; HPQ)
771
1
0.32
0.7
8,425
3,303
7.6
2,297
(6)
8.3
Technology
IBM ($166; IBM)
3,096
10
2.60
1.6
14,837
5,107
7.1
1,258
(6)
8.7
Technology
Lubrizol ($113; LZ)
94
11
1.44
1.3
481
(33)
6.4
67
(4)
7.7
Materials
McKesson
($78; MCK)
159
21
0.72
0.9
1,223
268
6.1
258
(6)
7.0
Health Care
Microsoft
($28; MSFT)
4,750
3
0.64
2.3
13,142
4,215
5.4
8,570
(4)
7.7
Technology
PepsiCo ($64; PEP)
2,918
8
1.92
3.0
3,498
217
3.4
1,612
2
6.4
Consumer
Staples
Research In Motion
($64; RIMM)
0
NM
0.00
0.0
2,120
837
6.4
524
(8)
6.4
Technology
Rogers Commun.
($35; RCI) e
716
25
1.28
3.6
1,366
836
6.7
574
(7)
10.3
Telecom Svcs.
Texas Instruments
($35; TXN)
592
4
0.52
1.5
2,047
845
4.9
1,189
(5)
6.4
Technology
TJX Cos. ($50; TJX)
220
14
0.60
1.2
1,102
459
5.5
403
(6)
6.7
Consumer
Discretionary
Travelers ($58; TRV)
673
(3)
1.44
2.5
4,630
3,108
17.6
455
(16)
20.1
Financials
UnitedHealth Group
($42; UNH)
449
NM
0.50
1.2
2,517
1,519
5.4
1,106
(5)
6.6
Health Care
Walgreen
($43; WAG)
571
21
0.70
1.6
1,872
206
4.7
934
(6)
6.3
Consumer
Staples
Wal-Mart Stores
($56; WMT)
4,399
7
1.21
2.1
13,143
5,105
6.4
3,631
(6)
8.6
Consumer
Staples
NM Not Meaningful because the companies paid little or no dividends in the historical period.    e Estimated.

 


Current Hotline

Stock Spotlight

Individual Stock Reports

ISRs make stock research easy!

Perhaps the most valuable two page reports available anywhere.

All the data you would normally have to plow through years of 10-K filings, earnings reports, and reams of market data to assemble — yours all in one concise report.

ISRs contain our proprietary Quadrix scores — find out how we rate all the stocks in the S&P 500.

Visit us at individualstockreports.com