Apple, Applied Materials and Andeavor are buying back stock on the cheap

  • By Jack Hough,
  • Barron's
  • Investing in Stocks
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Company stock repurchases look likely to surge this year. On the whole, that's a modestly positive sign—but it bodes particularly well for investors in value-priced shares that could be subject to above-average buying.

When companies buy back their stock, they reduce their share counts and increase their earnings per share, theoretically making remaining shares more valuable. Not all buybacks are good deals, however. What matters is whether companies are buying low.

Research by Insead finance professor Theo Vermaelen has shown that companies that buy back shares when valuations appear modest tend, on average, to go on to produce market-beating stock returns.

This year, companies will buy back $590 billion in stock, up 27% from last year, fueled in part by tax cuts, predicts Goldman Sachs strategist David Kostin. As in recent years, buyback spending this year looks likely to eclipse demand from mutual and exchange-traded funds, pensions, households, and all other sources.

In a recent report, Kostin points out that volume for Goldman's corporate trading desk reached four times last year's average daily level during the recent stock market correction. That's a sign that companies were using the dip to buy back shares.

We recently screened for companies in the Standard & Poor's 500 index (.SPX) that Wall Street expects to be aggressive share buyers this year, and found nearly 80 whose spending could top 4% of their stock-market values. Among these, we searched for modest share prices relative to projected earnings for the next four quarters to find the following three candidates.

Apple

  • Ticker symbol: AAPL
  • Forward price/earnings ratio: 14.4
  • Projected buyback yield, current fiscal year: 5.2%
  • Dividend yield: 1.4%

Forecasts for unit iPhone sales continue to drift lower. Wall Street currently predicts 223 million units during Apple's fiscal year through September, which is a million fewer than it predicted in February. As Barron's noted in a December cover story, iPhone customer retention rates are high, and when customers switch, they are slightly more likely to leave Samsung for Apple than the other way around. That suggests forgone unit sales for the current iPhone lineup could lead to upside for the next lineup, likely debuting this fall. Meanwhile, Apple's earnings per share are expected to rise 25% this year and 14% next year on pricing gains, swelling service revenue, and robust demand for accessories. Buybacks will help, too.

Applied Materials

  • Ticker symbol: AMAT
  • Forward P/E: 13.1
  • Projected buyback yield: 4.3%
  • Dividend yield: 1.4

Applied Materials makes equipment for manufacturing chips, including ones for memory and displays. Recent demand has been fierce. Earnings per share are expected to rise 37% this year to $4.44. The stock's modest valuation suggests investors are worried about a peak for chips. But the rise of big data and artificial intelligence, combined with the growing complexity and capital intensity of chips, could stretch out the current upcycle. And in recent investor meetings, management has suggested that the next downturn, when it comes, could see earnings declining only to $3.75 a share, likely more than the current valuation implies. Following its February earnings release, Applied doubled its dividend and added $6 billion to its existing share repurchase authorization of $2.8 billion.

Andeavor

  • Ticker symbol: ANDV
  • Forward P/E: 11
  • Projected buyback yield: 4.6%
  • Dividend yield: 2.4

Andeavor was called Tesoro until it changed its name following its $4.1 billion purchase of Western Refining last year. Shares peaked at over $120 in January but recently fetched about $100. The company generates half its profit from refining, a quarter from logistics, and another quarter from marketing. A recent Evercore ISI analysis of every refinery project under construction worldwide—about 300 of them—led the firm to project more growth in demand than supply through 2019, which bodes well for utilization rates and profit margins. Wall Street predicts 18% earnings-per-share growth for Andeavor this year and 23% next year. The company could generate cumulative free cash over the next three years equal to one-third of its market value.

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