3 Companies Betting Big on Themselves

Apple, Viacom, and Yahoo! are buying back substantial amounts of their own stock. This will aid earnings-per-share growth and drive a lot of shareholder value. Companies that are undervalued can generate stellar returns for shareholders with share repurchases.

Mar 14, 2014 at 3:00AM

A company's move to buy back substantial amounts of its own stock can create a lot of value for long-term shareholders. Apple (NASDAQ:AAPL), Viacom (NASDAQ:VIAB), and Yahoo! are doing just that, which will aid earnings-per-share growth by lowering the outstanding share count. Companies that bet heavily on their own stock tend to be good investments, as management -- which very likely has better information about the operation than outside investors -- is showing confidence in the organization.

Leading investors favor buybacks over cash dividends, due to their tax-advantaged status. Warren Buffett stated the following in his 1984 annual report:

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.

Apple uses its massive cash balance
Apple's (NASDAQ:AAPL)shares have been depressed for a while now, and the stock price took another hit when the company declared earnings last quarter. In the last quarter, Apple bought $5 billion of stock at an average price of $523.51 per share. The tech giant still had $32.1 billion left from its massive $60 billion share repurchase program at the end of the December quarter. So Apple will  eventually buy back close to 7% of its outstanding shares based on its market cap of $475 billion.

CEO Tim Cook has stated on numerous occasions that he believes that Apple stock is undervalued. He told The Wall Street Journal that his company bought $14 billion worth of stock in two weeks after Apple's stock price dipped after quarterly results. As the company's current share repurchase authorization is used up, Apple will almost certainly increase its buyback program.

The company is trying to grow its user base in large, underpenetrated markets such as China. Apple's management team has stated that it has great products in their pipeline; if that is the case, Apple will generate a lot of value for shareholders down the road. Buying a lot of stock at a reasonably cheap valuation will give its earnings per share a healthy boost. 

Yahoo! is creating value through buybacks
Internet heavyweight Yahoo! has been doing a great job of ramping up its user base to more than 800 million users, including 400 million mobile users. But monetization of its various Internet properties has been lackluster. Yahoo! has put the cash it received from its partial sale of Alibaba shares to good use, repurchasing more than $5.5 billion worth of stock in the last two years and dramatically bringing down its outstanding share count. 

In the most recent earnings call, Yahoo! disclosed that its management authorized another $5 billion in stock buybacks. Once Yahoo! manages to close the gap between users and monetization, and Alibaba hits the public equity markets, the company's fundamentals will improve significantly from current levels. Yahoo!'s plan to buy back roughly 13% of its outstanding shares will boost earnings per share going forward and drive the stock price higher.

Viacom is rapidly reducing share count
Last year, media and entertainment giant Viacom (NASDAQ:VIAB) announced that it would increase its stock buyback program from $10 billion to $20 billion. After its last earnings report, $8.9 billion of that repurchase program remains, which amounts 23% of the company's market cap. Viacom 10Q

Viacom's diluted EPS grew 30% in the last quarter, driven by a combination of organic earnings growth and the impact of its large share repurchase program. The company's major earnings driver is the media networks business which makes up almost 80% of its revenue. The media segment made up all of Viacom's operating income in the last quarter, as the company's filmed entertainment business suffered a loss.

The company controlled by media mogul Sumner Redstone has been creating compelling TV and film content for a long time. Its popular media networks, including MTV, VH1, Nickelodeon, and Comedy Central, reach more than 700 million households in more than 160 countries. Viacom does have a durable competitive advantage as a result of its widespread reach, strong content, and growing earnings power. Its share repurchase program will bolster its EPS substantially, and propel the stock price higher as a result.

The takeaway
Companies that have stellar competitive positions and adequate financial resources can generate a lot of value for shareholders by buying back their own stock. But companies that repurchase their own shares at very high prices destroy a lot of shareholder value. So buybacks should be analyzed carefully before being a part of an investor's thesis.

Here's a stock Motley Fool employees are investing in
Opportunities to get wealthy from a single investment don't come around often, but they do exist, and our chief technology officer believes he's found one. In this free report, Jeremy Phillips shares the single company that he believes could transform not only your portfolio, but your entire life. To learn the identity of this stock for free and see why Jeremy is putting more than $100,000 of his own money into it, all you have to do is click here now.

Ishfaque Faruk has no position in any stocks mentioned. The Motley Fool recommends Apple and Yahoo!. The Motley Fool owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information