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Love Share Buybacks? These 3 Stocks Are for You

By David Jagielski – Updated Sep 1, 2021 at 10:31AM

Key Points

  • These companies are all generating significant free cash flow, which makes it likely that they will continue buying back shares indefinitely.
  • Although their yields aren't terribly high, investors can also benefit from the recurring income these stocks offer.

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And as a bonus, they all pay dividends, too.

Share buybacks help bump up a stock's price and lead to stronger returns for investors. One of their benefits is that, as opposed to dividend income -- which will inflate your earnings, and over which you have little control -- you can decide when to sell shares (and thus, realize the gains) of an investment that may have soared, at least in part, due to share repurchases. And that can help you better manage your tax liabilities.  But regardless of how a company returns cash to investors, both dividends and share buybacks can put shareholders in a better position in the long run. 

And in some cases, you don't even need to choose between dividends and buybacks. Three companies that repurchase shares and also pay you on a regular basis are Cerner (CERN), Wendy's (WEN 2.28%), and Apple (AAPL -1.96%)

Businessman showing chart to co-worker.

Image source: Getty Images.

1. Cerner

Tech-focused healthcare company Cerner gives investors a way to benefit from more businesses moving their operations online. Cerner's electronic health record system allows businesses to easily review patient data, streamline workflows, and improve overall efficiency. It also enables companies to do data analysis to help drive better decision-making.

When the company released its latest quarterly results on July 30, sales of $1.5 billion for the period ending June 30 were up 10% year over year. The company's free cash of $162 million was a staggering 153% improvement from the prior-year period. Free cash is crucial for companies in determining how much money they can afford to spend on dividends and buybacks. Year to date, the company said it has spent $750 million on share buybacks. And for all of 2021, Cerner expects that total will hit $1.5 billion.

The healthcare stock pays a modest dividend that yields 1.2% -- just slightly below the S&P 500 average of 1.3%. But when you combine that with the buybacks, the potential for long-term growth, and the business consistently delivering gross margins of more than 80%, Cerner makes for a solid long-term investment that would be suitable for just about any portfolio. 

2. Wendy's

Fast-food chain Wendy's is coming off a strong quarter in August, reporting $493 million in revenue for the period ending July 4, representing year-over-year sales growth of 23%. Free cash flow for the past two quarters totaled $186 million -- more than 14 times the $13 million it generated a year earlier. With the economy in much better shape than it was a year ago, Wendy's has benefited from a stronger top line that has helped improve the rest of its financials. And if you're bullish on the recovery continuing, Wendy's becomes an even better potential buy.

During the period, the company repurchased more than $27 million worth of shares. As of its second-quarter earnings release on Aug. 11, the company still had $100 million it could spend on buybacks under its current authorization, which is good until February 2022. Over the trailing 12 months, Wendy's has spent $101 million on repurchasing shares, which is just under one-third of the cash flow it generated during that time frame ($349 million). In addition to buybacks, the company also creates value for its shareholders through its dividend, which yields just over 2% -- the highest on this list.

The dividend income is a nice bonus, but what's really great about Wendy's is the growth potential. The company recently announced it would open 700 delivery kitchens by 2025, which could help it benefit from a leaner model that leads to better profits and free cash flow -- paving the way for larger potential buybacks and dividend income. And so whether you're looking for growth or dividend income, Wendy's is a stock that you should consider for your portfolio.

3. Apple

Apple pays the lowest dividend yield on this list at just 0.60%. But with the tech giant continuing to report incredible numbers, there's little doubt that the business will return a significant amount of free cash back to investors for the foreseeable future. For the third quarter (period ending June 26), its revenue of $81 billion was up 36% year over year. Apple continues to fire on all cylinders, with every product category generating double-digit growth this past period. However, the company projects that the fourth quarter won't be as impressive, projecting only "strong double-digit year-over-year revenue growth."

But 30%-plus growth for a company the size of Apple just isn't a realistic expectation to begin with. Even modest increases in revenue should leave investors happy, as Apple generates a ton of money from its operations. The company's payout ratio of 17% is minuscule, and Apple could easily add more to its dividend. Currently, however, Apple distributes the bulk of its free cash through stock repurchases. In the trailing 12 months, the company has spent more than $83 billion on buybacks and just $14 billion on dividends. The company says it returned almost $29 billion back to its shareholders in Q3.

There's little reason to doubt that Apple will continue buying back shares or paying dividends. Its incredibly strong cash flow ensures there will be plenty of money for it to give back to investors. That, along with some impressive growth numbers, makes this an easy stock to justify putting in your portfolio and forgetting about.

David Jagielski has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Apple. The Motley Fool recommends Cerner and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Cerner Stock Quote
Cerner
CERN
Apple Stock Quote
Apple
AAPL
$148.11 (-1.96%) $-2.96
The Wendy's Company Stock Quote
The Wendy's Company
WEN
$22.42 (2.28%) $0.50

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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