If you're a regular StreetAuthority reader, you probably know
about the $1.7 trillion "Dividend Vault." Simplyput , that's the
name we've given to the unprecedented amount ofcash that U.S.
companies have stockpiled in the aftermath of the GreatRecession .
And for months now, we've been saying that this is great news for
That's because we're predicting that a large chunk of that $1.7
trillionwill go toward two things: dividends andstock buybacks. I
won't spend alot of time talking about what the "
" means for dividends today (if you're interested, you can read our
past coverage of this
Instead, I'm going to talk about the other side of the coin --
stock buybacks, namely, what they can do for investors, including a
group ofstocks I've got my eye on that are buying backshares at a
Buybacks in abull market
For as long as companies have been buying back stocks, investors
have questioned the wisdom of such moves. After all, a number of
companies have completed massive buyback programs in bull markets,
only to find that shares could have been bought at much lower
prices once themarket slumped in value.
That concern has been in the headlines again, as newly-announced
buyback activity remains quite robust, even as the market makes an
impressive spurt toward new highs. To test the wisdom of the
current buybacks, I looked at the data. [Roughly four months ago,
I looked at stocks
embarking on big buyback plans.]
All of the companies, with the exception of
, had plans to eliminate more than 10% of theirshares outstanding ,
and the market has surely responded. The averagegain for this group
since Nov. 5, 2012, is roughly 19.5% -- or nearly twice the gain of
the surging S&P 500.
Frombankruptcy to flush in just five years
On the list above, you'll notice two stocks from the same highly
cyclical auto parts industry:
Dana Holding (NYSE:
. These firms, along with most of their rivals, appeared to be in
deep financial distress when auto sales plunged in 2008 and 2009.
Just a few short years later, they are the picture of health and
have such fast-rising cash balances that ongoing major share
buyback programs likely will be the norm. (Each of the five auto
parts suppliers discussed in this column announced buyback plans in
Brett Hoselton, who follows the industry for
, noted that "the combination of under-levered balance sheets and
strongfree cash flow generation has left many auto suppliers with
substantial capital (i.e. billions of dollars) that can be deployed
in the form of accretive acquisitions, dividends or share
repurchases," adding that "auto suppliers are clearly becoming more
aggressive in their deployment of capital to shareholders,
particularly share repurchases."
Hoselton estimates that TRW, Dana,
might seek to retire 20%-40% of all of their available stock
through share repurchases. Looking simply at his price targets
relative to current prices, Hoselton said TRW appears tooffer the
greatestupside , with 35% potentialappreciation toward his $80price
I prefer to see stock buybacks when a company is trading below
tangiblebook value , as the math of buybacks becomes especially
compelling at that point. Unfortunately, Dana, Magna and Lear trade
for nearly two times tangible book value, while TRW and Borg-Warner
trade for more than four times book value.
In the context of price-to-earnings (P/E ) ratios, massive
buybacks make more sense. Most of these stocks trade for less than
10 times projected 2014 profits, and industryanalysts think that
sales of autos (and auto parts) will be even higher in 2015 and
2016 as the global industry gets back on its feet.
As an added kicker, theseprofit forecasts account only for share
buyback plans already announced and not the ones still to come.
Risks to Consider:
As noted, share buybacks can come at the top of the market,
which would, in hindsight, made these actions look ill-timed.
Action to Take -->
The charm of share buyback plans is that they provide downside
support if the market takes a tumble. Companies in the market for
their own shares tend to offset any external selling pressure in
place. And any market pullback -- if it does affect these stocks --
means these companies can acquire more shares for the same amount
With regard to the stocks I mention in this article, KeyCorp's
Hoselton says "There is as much as 10% to 40% potential upside
toearnings estimates should auto suppliers choose to aggressively
repurchase shares." Lear, Dana and Magna are most capable of buying
back nearly 40% of their share count, according to Hoselton, while
TRW and Borg-Warner could buy back a more modest 20% to 25% of
their share count. I agree with this analysis, and think any of
these stocks could provide solid support in a downturn, with
possible ample upside potential.
-- David Sterman
P.S. -- Want to know more about the $1.7 trillion "Dividend
Vault"? Simply put, it's the easiest way we know to collect
thousands of dollars in dividends each month for the rest of your
life. To learn more, click here.
David Sterman does not personally hold positions in any
securities mentioned in this article. StreetAuthority LLC does not
hold positions in any securities mentioned in this article.