Apple spent $645 billion on buybacks in a decade. These companies were even more effective.
By Philip van Doorn
An analysis of the S&P 500 shows that large reductions in share counts over the long term are correlated with good performance for stocks
Last week Apple Inc. said its board of directors had approved a new $110 billion stock buyback plan. That sort of number drives headlines and also opinions - might the money be used in a better way?
But in the stock screen below we are focusing only on how well companies have achieved the ostensible goal of stock repurchases - to lower a company's share count and lift its earnings per share. The idea is that over time, a significant reduction in the share count might help lift the share price.
Things get complicated because many companies are continually handing newly issued shares to their executives, which raises the share count. The share count may also rise if a company issues stock to raise money to fund its operations or to help pay for an acquisition.
At times, a company's buybacks will only mitigate the dilution from stock-based awards to executives. The share count might still increase while a company is repurchasing shares.
In the case of Apple (AAPL), the average share count used to calculate earnings per share has declined by 2% over the past four reported fiscal quarters. So even though the company's profit for the fiscal quarter ended March 30 was down 2% from a year earlier to $23.64 billion, its earnings per share increased a penny from a year earlier to $1.53.
The effect of a steady reduction of a company's share count
For 10 years through the most recent quarter, Apple's diluted share count declined by 37%.
How important is that decline? For one thing, the reduction in the carrying value of Apple's shares helped the company rank high among the S&P 500 SPX for 20-year returns on invested capital.
To repeat a simple example we used in MarketWatch's weekend roundup on Friday:
A company's profit is $1,000.There are 100 shares.Earnings per share came to $10.
If the share count were reduced by 10%:
The company's profit would still be $1,000.There would be 90 shares.EPS would be $11.11.EPS would have increased 11%.
A 37% decline in the share count would lead to a 59% increase in EPS, if all other things were equal. And it turns out that many U.S.-listed companies have reduced their share counts even more significantly.
Screening the S&P 500 for effective buybacks
Among companies in the S&P 500, 108 have been listed for at least 10 years and have spent more than $15 billion on share buybacks during that time.
Using data provided by FactSet, here are the 20 companies among those 108 that have lowered their share counts the most over the past 40 reported fiscal quarters:
Name Ticker 10-year change in share count Dollars spend on buybacks over past 10 years ($mil) 10-year price change 10-year total return Dividend yield Ebay Inc. EBAY -59% $37,240 130% 151% 2.19% American International Group Inc. AIG -53% $45,699 58% 99% 2.00% HP Inc. HPQ -48% $26,829 95% 164% 3.88% AutoZone Inc. AZO -48% $21,773 463% 463% 0.00% Ameriprise Financial Inc. AMP -47% $16,201 284% 382% 1.39% Discover Financial Services DFS -47% $17,299 125% 179% 2.23% O'Reilly Automotive Inc. ORLY -45% $19,801 591% 591% 0.00% Lowe's Cos. Inc. LOW -45% $60,677 410% 510% 1.90% McKesson Corp. MCK -43% $19,189 220% 246% 0.46% HCA Healthcare Inc. HCA -41% $31,407 497% 532% 0.85% Allstate Corp. ALL -41% $18,770 201% 274% 2.16% LyondellBasell Industries NV LYB -41% $19,589 6% 71% 5.01% Biogen Inc. BIIB -39% $27,342 -16% -16% 0.00% Marathon Petroleum Corp. MPC -39% $40,575 278% 418% 1.81% Oracle Corp. ORCL -38% $130,225 189% 237% 1.35% Valero Energy Corp. VLO -38% $18,181 170% 301% 2.71% Yum Brands Inc. YUM -37% $15,493 150% 201% 1.97% Apple Inc. AAPL -37% $645,285 756% 872% 0.55% Corning Inc. GLW -37% $16,043 62% 111% 3.35% Aflac Inc. AFL -37% $17,556 174% 249% 2.36% Source: FactSet
Among these 20 stocks, 12 have outperformed the S&P 500's 232% total return over the past 10 years. All but three have had returns exceeding 100% and only one, Biogen Inc. (BIIB), is down for that period.
In case your first reaction is that having 60% of the list beating the index return isn't impressive, consider that, among the 469 stocks in the S&P 500 that have 10-year trading records, 202 (or 43%) have beaten the index's total return, while 139 (or 30%) have returned less than 100%.
This 10-year lookback at the effective use of buybacks doesn't give you enough information to make an investment decision, but it can help you to get started. You begin your research by clicking the tickers for more about each company.
Click here for Tomi Kilgore's detailed guide to the wealth of information available for free on the MarketWatch quote page.
Don't miss: Here are the most efficient companies within the S&P 500's bargain-stock sector
-Philip van Doorn
This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently from Dow Jones Newswires and The Wall Street Journal.
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05-07-24 0902ET
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