The last time U.S. companies did this, investors saw gains of 191%, 309% and even 392%. Here's how you could set yourself up for future gains...
Could These Buyback Machines See Triple-Digit Gains Again?
By Christian Hudspeth
Corporate America has been getting creative with how they reward
It's something that will keep happening as long as interest rates remain
low. And as PIMCO founder Bill Gross (a.k.a. the "Bond King") said in
a recent memo,
that could be for a while.
As Gross said: "We still believe the Fed will be on hold until mid-2015
and will hike [interest rates] only gradually to our New Neutral 2% by
While that's disappointing news to those collecting next to nothing from
their savings, it's certainly not bad for all.
In fact, it's led to some smart financial engineering that's benefiting
many of the largest U.S. corporations right now. And the tactics they're
using have steered investors to gains of 191%, 309% and even 392% in the
More importantly, it's an opportunity that could lead you to
triple-digit gain potential in the future if you know what to look for.
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As our resident expert in all things related to dividends and buybacks,
Nathan Slaughter, recently pointed out, U.S. corporations have been
borrowing trillions to buy back shares of their own stock and pay
dividends to shareholders.
As he said in the latest issue of his
Total Yield newsletter:
Consultancy firm Paradarch Advisors did a study to see what companies
were doing with their borrowed cash. Of the $3.4 trillion in debt taken
on by non-financial companies since 2009, 87% (almost 90 cents on the
dollar) was sent back to shareholders through buybacks.|
...With the Fed deliberately keeping money loose [and interest rates
low], it has never been cheaper for solid businesses with
investment-grade credit to borrow...
To some, it may seem crazy to take on debt -- and the interest
obligations that go along with it -- just to buy back shares. But
there's merit to this practice. In fact, if a company uses this type of
leveraging wisely, it could lead to big gains for shareholders down the
As Nathan explains:
"...Regardless of whether a company's funding comes from debt or equity,
what matters most is the ability to generate returns on capital that
exceed the cost of capital. |
Profit Powerhouses that can systematically take $1 and turn it into
$1.20 (or more) each year would be crazy not to borrow $10 million, or
$100 million, or $1 billion -- and then use the money to earn an
incremental $2 million or $20 million or $200 million annually.
How has this financial engineering benefited investors in the past?
"...when done for the right reasons under the right conditions, this
[type of leverage] can be a powerful strategy. With that in mind, I went
looking for companies that are using it to the benefit of their
You can see what I found in the table below.
|Trailing 12-Month |
|Apple (Nasdaq: AAPL)||2.3%||$43.9 B||391.8%|
|Union Pacific (NYSE: UNP)||2.1%||$2.5 B||337.4%|
|Home Depot (NYSE: HD)||3.1%||$7.5 B||308.9%|
|FedEx Corp (NYSE: FDX)||0.5%||$4.9 B||190.8%|
|Cisco (Nasdaq: CSCO)||1.8%||$9.2 B||48.1%|
|S&P 500 Index||1.9%||N/A||117.1%|
As you can see in the table, all but one of these large repurchasers
have posted five-year gains that have crushed the S&P 500.
Now, no one can promise that every company using leveraged buybacks will
do this well, and Nathan reminds investors to be aware of the risks
I wouldn't want to see a company borrow to the point where it
jeopardizes its standing with credit rating agencies. Nor do I want to
see a company engaging in this activity just to meet short-term earnings
targets at the expense of long-term financial health...
But overall, it's clear that these leveraged buybacks can lead to some
impressive triple-digit returns -- plus dividends as bonus -- in just a
few years time.
The companies Nathan mentions in the table above are a great place to
start looking for future gain opportunities from this latest buyback
trend, but that's just the tip of the iceberg.
In his latest research, Nathan has found a little-known New Jersey
company that has bought back several million of its own shares --
helping its share price soar 1,260% in the past five years. Another
company he's found -- which he's nicknamed the "buyback king" -- has
bought back nearly 10% of its outstanding shares in just the past year
and could lead investors to more large gains if they get in before the
crowd. To get Nathan's latest
"Total Yield" research, including the
and ticker symbols of these stocks as well as others, watch this video.