Since 1991, a sector-neutral basket of the S&P 500 stocks with the highest trailing combined dividend and buyback yields has returned an annualized 15.7% versus 13.8% for the top capex + R&D spenders and 12.8% for S&P 500. It seems this could be a great way to invest.
What is a stock purchase?
A stock repurchase occurs when a company asks stockholders to tender their shares for repurchase by the company. This is an alternate way for a company to increase value for stockholders. First, a repurchase can be used to restructure the company's capital structure without increasing the company's debt load.
Additionally, rather than a company changing its dividend policy, it can offer value to its stockholders through stock repurchases, keeping in mind that capital gains taxes are lower than taxes on dividends.
Advantages of a Stock Repurchase
Many companies initiate a share repurchase at a price level that management deems a good entry point. This point tends to be when the stock is estimated to be undervalued. If a company knows its business and relative stock price well, would it purchase its stock price at a high level? The answer is no, leading investors to believe the management perceives its stock price to be at a low level.
Unlike a cash dividend, a stock repurchase gives the decision to the investor. A stockholder can choose to tender his shares for repurchase, accept the payment and pay the taxes. With a cash dividend, a stockholder has no choice but to accept the dividend and pay the taxes.
At times, there may be a block of shares from one or more large shareholders that could come into the market, but the timing may be unknown. This problem may actually keep potential stockholders away since they may be worried about a flood of shares coming onto the market and lessening the stock's value. A stock repurchase can be quite useful in this situation.
However, let's come back to the real facts from the market. Attached you will find 10 stocks with the highest buyback yield of the past twelve months. The yield starts at 14.9% and ends at nearly 40%. Great values.
Here they are sorted by yield...
