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What are we looking for?

S&P 500 companies buying back shares.

The screen

For some retail investors, stock dilution is something that isn't always top of mind. Recall that publicly listed companies have the ability to dilute or buy back shares which ultimately increases or decreases supply of stock available to be traded, ultimately affecting the price per share. Core economic principles tell us that when demand is constant and supply decreases, the price increases and vice versa. For this reason, investors may want to look for companies that are reducing share count.

This week, we use Morningstar CPMS to look for companies that are buying back shares with low volatility. The strategy ranks stocks on:

  • Buyback yield (which is the trailing 12 months’ payment from the company for buying common stock minus the trailing 12 months’ proceeds from selling common stock divided by market cap – higher buyback yields are preferred here);
  • Five-year historical beta (recall that beta measures a stock’s sensitivity to the historical movement of a benchmark index. A company with a beta less than one has moved less than the index in trending markets historically, which is preferred here).

To qualify, companies must be part of the S&P 500 total return index.

More about Morningstar

Morningstar Research Inc. provides independent investment research in North America, Europe, Australia and Asia. Its research tool, Morningstar CPMS, provides quantitative North American equity research and portfolio analysis to institutional clients and financial advisers.

What we found

I used Morningstar CPMS to back test this strategy from April, 2004, to December, 2017. During this process, a maximum of 20 stocks were purchased and equally weighted with no more than four stocks per economic sector. Stocks would be sold if their rank fell below the top 30 per cent of the index based on the above two factors. When sold, the positions were replaced with the highest ranked stock not already owned in the portfolio. Over this period, the strategy produced an annualized total return of 11.9 per cent while the S&P 500 total return index produced 8.9 per cent. It's also worthwhile to note that in all quarters over this 13-year period where the index showed negative returns, our strategy beat the benchmark 86 per cent of the time. The stocks that meet our requirements for purchase today are listed in the table.

Investors are advised to conduct their own independent research before purchasing any of the investments listed here.

Ian Tam, CFA, is a relationship manager for CPMS at Morningstar Research Inc.

Select U.S. companies that have bought back shares

RankCompanyTickerSectorMarket Cap ($Mil U.S.)Buyback Yield (%)5Yr Historical BetaDividend Yield (%)Recent Price ($)
1Conagra Brands Inc.CAG-NCons. Staples 14,980.7
2Michael Kors HoldingKORS-NCons. Disc. 9,705.7
3HCA Healthcare Inc.HCA-NHealth Care 30,448.5
4Signet Jewelers Ltd.SIG-NCons. Disc. 3,424.6
5Assurant Inc.AIZ-NFinancials 5,333.3
6Yum Brands Inc.YUM-NCons. Disc. 27,889.6
7O'Reilly Automotive Inc.ORLY-QCons. Disc. 22,295.5
8XL Group Ltd.XL-NFinancials 8,758.3
9Aetna Inc.AET-NHealth Care 59,872.0
10Express Scripts HoldingESRX-QHealth Care 45,258.9
11Sysco Corp.SYY-NCons. Staples 31,982.4
12Intuitive Surgical Inc.ISRG-QHealth Care 44,550.2
13Tyson Foods Inc.TSN-NCons. Staples 30,248.6
14Constellation BrandsSTZ-QCons. Staples 43,241.5
15Hartford Financial ServicesHIG-NFinancials 19,608.8
16Motorola Solutions Inc.MSI-NIT 14,923.4
17Grainger WW Inc.GWW-NIndustrials 13,521.5
18VeriSign Inc.VRSN-QIT 11,135.5
19SBA Communications Corp.SBAC-QReal Estate 19,224.1
20Fiserv Inc.FISV-QIT 28,402.8

Source: Morningstar Canada