When investors think about their potential winnings through the stock market, two methods typically get the lion’s share of attention. The most straightforward appreciation will happen through the classic buy low and sell high (with a little luck). Second, dividend income has become a common preference during high inflation.
Focusing on dividends, the primary method managements use to repay their shareholders, may not be the most effective way for investors to get their money back. In just a bit, it will become clear that share buybacks are a much better way for shareholders to feel the love, as they let investors compound their wealth more efficiently.
Apart from being superior in efficiency, share buybacks can send investors—and markets—a broader message. If insiders are buying back their own stock, wouldn’t it be logical that they think it’s cheap? Suddenly, stocks like AutoNation Inc. (NYSE: AN), eBay Inc. (NASDAQ: EBAY), and even Apple Inc. (NASDAQ: AAPL) may be on the cheaper end as management initiated aggressive buyback programs.
Buybacks Are the Real Life Hack
Because dividends are paid with a company’s free cash flow (operating cash flow minus capital expenditures), investors will receive their dividends through taxed money. Once investors receive these dividends, they must also pay their share of taxes.
Why go through double-taxation and take from the company’s cash balance when investors could pick the compounding route? When management buys back stock, they increase your ownership in the company as an investor, enabling you to compound your wealth faster.
Ideally, investors pick growing – and profitable – companies for their portfolios, so when management decides to buy back stock, they will own a larger piece of a growing pie. Of course, not all buybacks are made equal, as some companies trick investors by buying back stock by issuing debt, which is like paying your credit card with another credit card.
Three Companies Buying Back Stock Right Now
It could be said that, as the Federal Reserve (the Fed) prepares to cut interest rates later this year, management is getting ready to invest in AutoNation’s future, as cheaper vehicle financing could drive demand higher in the car market.
As the ISM services PMI index had its first contraction reading since 2020, the Fed may have another reason to bring on these cuts, and eBay management is right there to ride the recovery in the business services sector.
The stock market’s darling, Apple, is still the same cash cow as ever. Because of its predictable – and growing – free cash flow, management took a stance to ensure aggressive buybacks send investors a message: The stock is cheap!
1. AutoNation is Behind the Wheel
Based on price action, AutoNation is not cheap, as it trades at 90% of its 52-week high today. Following the future demand for vehicles in the U.S. market, investors are jumping on board with management’s $1 billion stock buyback program, looking to buy up to 14.9% of all shares.
Thinking along the same lines as management, analysts at Bank of America slapped a $215 price target on AutoNation stock, calling for a 31% upside from its current price.
According to the company’s financials, AutoNation generates up to 12% returns on invested capital (ROIC), so investors can rest assured that these buybacks aren’t a trick but are financed by steady profits.
2. eBay’s Bears Went Running
After realizing eBay’s management will buy up to $2 billion in stock, the company’s short interest declined by 6.4% in the past month in a show of bearish sentiment retreat. More than that, eBay stock rose to 96% of its 52-week high to let the bulls take over.
As stocks like Shopify Inc. (NYSE SHOP) popped on earnings, showing that the digitized economy is a new escape for businesses seeing their margins squeezed by the U.S. stagflation (low economic growth with high inflation), analysts at Barclays boosted eBay’s valuation to $65 a share, or 27.5% above today’s prices.
But that’s not all; the Vanguard Group saw fit to boost its stake in eBay by 7.7% as of May 2024, bringing its total investment up to $3.3 billion. Investors could say the company’s 13% ROIC was a sign of confidence.
3. Management Bites the Apple
A behemoth of a buyback program, Apple’s management set aside $110 billion to buy back stock. Far from a price action discount, Apple stock trades at 92% of its 52-week high despite facing some headwinds in its recent quarterly earnings announcement.
Investors know that Apple’s moat will likely get over this temporary bump in the road. Hence, those at Bank of America see a price target of up to $230 a share. Apple would have to pull off a 26% rally from today’s price to prove analysts right.
Generating up to 42% ROIC in the past 12 months, investors may apply the ‘buy and forget’ mentality here, as these profits are more than enough to let the company afford these buybacks and then some.
