2013 Will Be the Year of the Buyback

It's clear which way companies have chosen to return money to their shareholders in recent weeks. What started off as dozens of companies declaring special one-time distributions is now hundreds of companies that are either declaring chunky dividends or moving up some of next year's payouts.

The appeal to dividends now is obvious: Payouts will cost shareholders more next year. The top rate on qualified distributions is currently 15%. If there aren't any last-minute reprieves, taxes on dividends could be as high as 43.4% for top earners.

In a sea of special dividends, it was interesting to see Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) buck the trend with a peculiar buyback announcement yesterday. Berkshire Hathaway will be buying 9,200 Class A shares from a longtime shareholder's estate in a $1.2 billion transaction.

It's not the only stock repurchase that was announced on Wednesday. Chemical giant DuPont's (NYSE: DD  ) board authorized a $1 billion share repurchase program. Earlier this month, Sirius XM Radio (NASDAQ: SIRI  ) turned heads by authorizing a $2 billion buyback.

These are substantial commitments by companies to eat their own cooking, but you haven't seen anything yet. Just wait until next month.

I'm not going out on much of a limb by calling 2013 the year of the buyback. All of the companies that have been busy digging into their coffers for accelerated and special dividends this month won't have much of an incentive come January. If anything, companies declaring special distributions early next year will be ridiculed for not pulling off the transaction in 2012.

Companies return money to their shareholders through dividends and buybacks. Now that we're weeks away from dividends being less lucrative to investors in taxable accounts, the shift will turn to repurchases.

Investors should be grateful.

Next year will be challenging. Regardless of which way the fiscal cliff situation plays out, there will be plenty of belt-tightening next year. Companies will be more cautious with their investments, and earnings growth may be harder to come by. Stock buybacks are perfect in that regard. Hacking away at the number of shares outstanding results in higher earnings on a per-share basis.

Some companies will have extenuating circumstances for going the buyback route. Sirius XM Radio is simply arming itself to respond to an inevitable spinoff. DuPont is deploying money that won't be used in the near term. In a Reuters interview on Wednesday, DuPont CEO Ellen Kullman said that the chemical giant will spend less on capital projects in 2013 as a result of fiscal cliff uncertainty.

Next year, the buybacks won't need a reason. Companies will want to deploy money in a manner that enhances bottom-line results, and nothing does that on a per-share basis as well as buybacks.

If you think the dividend deluge was something this month, just wait until you see what's beating on next month's umbrella.

Checks and balances
Subscribers to the Income Investor newsletter can appreciate the companies sending more and more money to their investors. The newsletter singles out companies that are committed to growing their distributions with market-thumping results. A 30-day trial subscription will let you see if it's right for you.

If you'd like to learn more about Berkshire Hathaway in the wake of the buyback, The Fool's resident Berkshire Hathaway expert, Joe Magyer, has created this premium research report on BerkshireInside, you'll receive ongoing updates as key news hits, as well as reasons to both buy and sell the stock. Claim a copy by clicking here now.


Read/Post Comments (1) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On December 13, 2012, at 12:35 PM, GETRICHSLOW2 wrote:

    And there will billions flushed down the drain. Many people hold their stocks in tax sheltered retirement funds which so far will not be affected.

    Give me the dividend!

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2152402, ~/Articles/ArticleHandler.aspx, 10/25/2014 1:34:20 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement