Share buybacks seem to be as talked about as dividends in this market. And they can be one sign of a quality company.
They are a good indication of an investor-friendly company, which is good for retired folks. And they are also one measure of financial health.
Buybacks are supposed to create higher earnings per share, which is good. But according to a recent article in The Wall Street Journal, not all buybacks are equal. The article had some good guidelines for judging companies that buy back their stock.
First, if you are looking at buybacks as a reason to own a stock, make sure the share count is going down. Buybacks only matter if they reduce the number of outstanding shares.
While 317 companies in the S&P 500 had stock buybacks last year, only 98 actually reduced the number of outstanding shares. The rest were just spinning their wheels. Only 36 companies shrank their share count by 1% or more last quarter.
Next, make sure the buyback is not linked to the health of a company. Many companies will buy back shares if their managers’ bonuses are tied to earnings per share and they would otherwise miss their estimates.
And look for companies that are buying back at decent prices… not just when their stock price is roaring or their earnings are at a high.
The example The Wall Street Journal used was Dell (NASDAQ: DELL). It did a buyback at $40 a share and the stock then fell like a rock. Not good decision making.
The one stock mentioned in The Wall Street Journal article that has a strong dividend history, spends more on buybacks than dividends, and is very appropriate for retired investors is AT&T (NYSE: T).
AT&T boasts a high dividend of 4.9% and, according to the article, just a small increase in revenues going forward will support the company’s strong cash-back position to investors.
It meets all of our goals: essential industry, long-term trend, dividend, dividend growth and also a strong cash-back position to its shareholders.
I know it’s a name we all know, but it is also one we should all own.
Editor’s Note: We are proud to announce the official launch of The Oxford Income Letter. The inaugural issue was released earlier this week. To learn more about the intriguing (and potentially lucrative) economic event that helped lead to its creation, click here.