I’m always looking for signs that a company is making moves to keep shareholders happy.
Somebody recently asked me about share buyback programs, one of the actions they take to do that.
Am I for them or against them?
It’s a good question, especially since share buybacks have become pretty popular in the 21st century… even overtaking dividends as something many investors look for.
You see, when a publicly traded company purchases its own shares, it almost always boosts the price of said stock. And that’s a short-term gain a lot of people like to see.
My regular readers should know by now, however, that dividends are front and center on my mind. That’s what I do here at Intelligent Income Daily: I fill you in on opportunities that can boost your portfolio performance – usually through dividend-paying companies and dividend-focused strategies.
My team and I have decades of collective proof that this focus works in bull markets and bear markets alike.
So, am I for share buybacks? The short answer is yes… Just as long as they don’t mess with my dividends.
When I’m looking at a company and how it handles its obligations, I want to see it prioritize:
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Paying dividends
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Reducing debt
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Buying back stock.
In that order.
An investor has to have his or her priorities. And those are mine. Today, I want to show you why this is an intelligent approach.
The Bright Side of Share Buybacks
Here’s the thing about share buybacks…
They cost money.
Another thing about them: Companies often borrow money to make them happen.
That’s not always a bad idea, believe it or not. Loan interest is tax-deductible, after all. (At least it is now. That will change to a degree next year for reasons I won’t get into here.) And depending on borrowing rates, companies can make a lot more than they lose on this kind of action.
One good example of a company following my list of priorities is Exxon (XO).
High energy prices have translated to massive earnings for the oil company. In addition to expanding its business, it’s also been using those earnings to reward shareholders.
It spent $6 billion in the first half of 2022 alone on share buybacks. And it says it will spend $30 billion total between this year and the next.
Clearly, Exxon is an excellent position to be buying back shares. It has the money to do so… is setting money aside for other important business functions… and still offers a healthy – dare I even say beautiful? – $3.52 per-share dividend.
With a setup like this, shareholders are winning no matter which way they look.
The Side You’d Rather Not See
Now for an example of a company that hasn’t been so impressive with its buyback situation…
General Electric (GE) was a stock market darling once upon a time. But that ship sailed a while ago.
It could come back again. I’m not saying GE is hopeless. But I do agree with Barron’s assessment earlier this year that the company has “a legacy of poorly timed acquisitions and stock buybacks.” That’s left it with too much debt.
Specifically, it spent about $32 billion on stock buybacks between 2012 and 2017. Moreover, it did so at elevated prices that shares haven’t been able to recapture.
That, no doubt, factored into its dividend cut in 2017 – from $0.24 to $0.12. And GE had to slash that again the following year down to $0.01, where it stayed until 2021.
Today, the company’s dividend is $0.08, a mere fraction of where it used to be.
For us, no amount of share buybacks can make up for that kind of failure.
Again, this isn’t to say GE can’t be a good investment going forward. The company has worked hard the last few years to repair the damage it’s done.
Even so, it remains a cautionary tale of what can happen when a business prioritizes its financial options the wrong way. Share buybacks should only take precedence over debt reduction when debt reduction is already a part of corporate strategy.
And it should never come before dividends.
That extra cash into shareholders pockets should always be king.
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily