You hear stock analysts talking about buybacks being a major reason to buy shares in companies all the time… but don't be fooled.
Generally speaking, stock buybacks can be rewarding. They're often seen as a way for a company to pass value on to shareholders. When companies purchase their own shares and take them out of circulation, it ultimately increases the value of remaining shares.
But beware... not every company that buys back its own stock is worthy of investment.
Ulterior motives can come into play. For example, a company might use buybacks to artificially hike its share prices to mask poor earnings or other negative aspects that could send stock prices south.
So don’t automatically assume that a company that purchases its own shares is a “buy.” Buybacks can just as easily signal big problems.
That said, in 2013 buybacks were en vogue. Companies shelled out $750 billion to take stock out of circulation. And they still have lots of cash on hand -- some $1.14 trillion and equivalents to be exact. So there's little reason to believe 2014 won't see more of the same.
Here are three companies that are rolling in lots of dough and dishing it out to investors that could be great additions to your portfolio.
General Electric (NYSE: GE)
If you haven’t updated your cache on GE recently, you may still associate the company with NBC and GE Capital, two asset-sucking arms that GE dumped for a renewed focus on the Industrial Internet and Smart Technology.
GE is buying back stock at an average rate of about $2 billion per quarter, which at the current $25 share price means it is reducing the share count by almost 3% annually. Plus, sitting on $87 billion, GE normally returns about half of its profits to shareholders in the form of dividends.
In 2009, GE fell on hard times and had to reduce its dividend for the first time. That said, during the years prior to that, GE had built up quite a track record of raising its payout (up more than 200% in 12 years). And since 2009, the company has returned to its old ways and has increased its payout by more than 100% so far.
Considering the company is experiencing an 8% annual growth rate in profits, investors could see continued dividend growth and capital appreciation in coming years.
Despite having gone through hard times, GE's consistent record of buying back shares and increasing its dividend, along with an impressive growth rate convince me that it's a "buyback" stock worth investing in. It could actually end up being an income and growth investor’s dream stock.
United Parcel Service (NYSE: UPS)
UPS is a $93 billion company with more than $40 billion in gross profit in its last fiscal year.
The company is building momentum from a number of actions: an expanded presence in China, the signing of a new national master contract with employees, and the purchase of 700 liquefied natural gas trucks and 13 fueling stations by the end of 2014 that will eliminate the need to buy 24 million gallons of diesel fuel annually -- to name a few.
UPS spent $3.8 billion on buybacks and $2.3 billion on dividend payments last year. Not to mention it generated $5.3 billion in free cash flow.
Another buyback worth $2.7 billion is in the works for 2014, adding an exclamation point to what appears is going to be a banner year for the delivery service.
UPS is riding the growing trend in online retail sales in the U.S., expected to compound at an annual growth rate of 9% through 2017, according to Forrester.
If you’ll recall, UPS ended 2013 on a bad note. An extraordinary number of procrastinating holiday shoppers caused a 63% upswing in orders on December 23. Despite hiring an additional 30,000 temporary employees to help with the more than 31 million packages that day, UPS was uncharacteristically unable to deliver all of them on time.
The snafu was bad enough that UPS missed its fourth-quarter earnings target. But I’d suggest that we all just forgive and forget the guys driving the brown trucks. 2014 earnings are expected to increase by 10% to 15% in line with long-term targets.
I have confidence in UPS as a delivery service and a winning stock. Something tells me they won’t be caught off-guard if shoppers procrastinate again this year.
Bally Technologies (NYSE: BYI)
This may be the world’s oldest maker of slot machines, but Bally’s reputation as an innovator and leading competitor in the gaming market makes it a good bet.
Bally won 80 innovation awards in the past year as it continues to focus on R&D. Its expansion of online slot games into the U.K. and on Mr. Green -- the name of the country’s leading gambling site -- and all-around higher availability on tablets and mobile devices, has positioned the $2.6 billion company for a strong 2014.
What’s even better about Bally (besides its 70% gain in 2013) is the fact that it can invest regularly in developing new technology and still afford to buy back shares.
Strong cash flow allowed it to reduce shares by 9% over the last 12 months and 29% over the past three years. That's a good track record for returning value to its investors. And in April 2013, the company doubled its buyback program to $300 million.
Another plus for Bally came last November when it completed the $1.3 billion purchase of casino equipment company SHFL Entertainment Inc., formerly known as Shuffle Master. Bally expects to capitalize on SHFL’s expertise in table games, especially its signature product: automatic card-shuffling machines.
In the final quarter of 2013, total revenue increased 20% to a quarterly record $285 million -- a market increase compared with $238 million last year.
There is no telling how long share buyback programs will remain popular, but whatever the duration, these three companies are implementing theirs for the right reason: to reward loyal investors.
Risks to Consider: It’s always smart to keep an eye on the balance sheets of companies buying back shares to make sure their motivations for doing so don’t change. If there’s a sudden boost in numbers, it could be a sign of negative earnings announcement or shift in profits.
Action to Take --> All three of the stocks above are financially stable, hold a lot of cash and reward shareholders. It makes sense for investors seeking income as well as growth to consider buying these stocks now.