Please ensure Javascript is enabled for purposes of website accessibility

Buybacks Top Dividends in the Third Quarter

By Jordan Wathen - Sep 24, 2013 at 5:01PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

S&P 500 components are spending more on buybacks than they are on dividends.

Source: Franck BLAIS

Corporate executives are hungry -- hungry for their own shares, that is.

The average S&P 500 (SPY 1.69%) component spent more buying back its own stock in the last 12 months than it spent paying dividends, according to FactSet data

Will buybacks pay off for shareholders?
Investors have a love-hate relationship with buybacks. For one, executives demonstrate poor market-timing skills as a whole, buying back stock at high prices and canceling repurchase activity at market bottoms. And let's not forget that small buybacks often cover up new stock options issued to the very same executives.

Of course, there are two sides to every coin. Buying back stock is a tax-efficient mechanism for returning cash to shareholders. Whereas dividends are taxed at up to 23.8% for earners in the top brackets, share repurchases do not trigger an immediate tax liability. That makes them a favorite among total-return value investors.

In a letter to Berkshire Hathaway (BRK.A 1.66%) (BRK.B 1.71%) shareholders, Warren Buffett once wrote:

"Charlie and I favor repurchases when two conditions are met: first, a company has ample funds to take care of the operational and liquidity needs of its business; second, its stock is selling at a material discount to the company's intrinsic business value, conservatively calculated."

To sum it up: If a company's stock is cheap with conservative inputs, and it has no other use for cash on hand, buying back stock is a great use of cash. In fact, Buffett has his own repurchase criteria for Berkshire Hathaway: He'll buy at any price lower than 1.2 times book value.

These companies are buying like mad
So, who's most active in buying back their own stock? This one may surprise you: Dun & Bradstreet (DNB), a small-cap corporate credit ratings company. 

Though it's not widely followed, Dun & Bradstreet has robust capital allocation plans that favor shareholders. It repurchased 16.9% of its outstanding shares in the last year, and since 2003, its share count has fallen by 43%. The company's core business model requires very little in the way of new investment, allowing it to return virtually all of its earnings to shareholders each year.

Other financial sector companies were also in the market for their own stock. AIG (AIG 1.92%) cut its share count by 14.6% in the last 12 months, purchasing the average share at a 14% discount from where it trades today.

AIG still has a long way to go to bring its share count back to a pre-financial crisis level. At one point, the U.S. Treasury owned 92% of the company -- ownership derived from newly issued shares.

Even after the financial crisis dilution, AIG still finds relative value in its shares, which trade for 75% of their tangible book value.

The Foolish bottom line
Quarterly data can be interpreted and digested in a million different ways, but it should serve first and foremost as a reminder. Remember that the primary role of the corporate manager is to make capital allocation decisions on your behalf, and that means making decisions about what's rightfully yours to ensure the best possible returns.

Look into your own portfolio to see who is buying back stock and who's issuing new stock. You may be surprised at what you find. 

Fool contributor Jordan Wathen has no position in any stocks mentioned. The Motley Fool recommends American International Group and Berkshire Hathaway. The Motley Fool owns shares of American International Group and Berkshire Hathaway and has the following options: long January 2014 $25 calls on American International Group. 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.A
$452,697.25 (1.66%) $7,395.26
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$301.55 (1.71%) $5.08
American International Group, Inc. Stock Quote
American International Group, Inc.
AIG
$57.41 (1.92%) $1.08
The Dun & Bradstreet Corporation Stock Quote
The Dun & Bradstreet Corporation
DNB
SPDR S&P 500 ETF Trust Stock Quote
SPDR S&P 500 ETF Trust
SPY
$427.10 (1.69%) $7.11

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

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
400%
 
S&P 500 Returns
128%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/15/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.