Alvin Lau is an investment analyst at Longview Asset Management Ltd. in Toronto.
What are we looking for?
U.S.-based companies that buy back their own shares for cancellation.
At Longview, one of the things we look for in companies is a strong track record of capital allocation. There are five ways a company can allocate excess cash: invest in existing operations, acquire a business, pay down debt, issue dividends – or buy back its shares for cancellation.
Share buybacks only create long-term value for ongoing shareholders if they are done when the stock is undervalued and when no better investment opportunities are available.
Done right, buybacks allow ongoing shareholders to increase their ownership in a company and enjoy a concomitant increase in the value of their shares over time. And unlike dividends, the buyback of undervalued shares allows shareholders to enjoy gains without paying tax in any particular year as the value of their investment grows.
To limit our results to high quality companies, we have included a return on capital measure in our screen.
My colleague Kelly Brown and I used the S&P Capital IQ Screener to find firms that have:
-at least 20 per cent fewer shares outstanding than five years ago;
-a return on capital of greater than 10 per cent;
-a market capitalization greater than $10-billion (U.S.).
More about S&P Capital IQ
S&P Capital IQ offers a set of tools for fundamental analysis of global securities as well as idea generation and work flow management. Its Web- and Excel-based platform provides access to both real-time and historical information.
What did we find?
The 10 companies listed here have repurchased a significant amount of their shares. And some have done so when their shares were undervalued.
AutoZone, for example, has reduced its share count by 36 per cent over the past five years in a highly disciplined manner. This means shareholders who owned AutoZone stock in 2008 and held on, have seen the value of their investment increase more than the growth in the value of the company as a whole – all on a tax-deferred basis.
None of these companies are guaranteed to beat the market, but screens such as this can be useful for identifying potential investment ideas. Before investing in any of these companies, do your own research.
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U.S.-based companies buying back their own shares
|The Gap, Inc.||GPS-N||19,802||-33.1%|
|Northrop Grumman Corp.||NOC-N||19,738||-27.5%|
|The Kroger Co.||KR-N||18,473||-20.2%|
|Zimmer Holdings, Inc.||ZMH-N||13,434||-24.0%|
Source: S&P Capital IQ
|The Gap, Inc.||GPS-N||19,802||-33.1%||28.8%|
|Northrop Grumman Corp.||NOC-N||19,738||-27.5%||13.9%|
|The Kroger Co.||KR-N||18,473||-20.2%||13.8%|
|Zimmer Holdings, Inc.||ZMH-N||13,434||-24.0%||11.2%|