Could These Buyback Machines See Triple-Digit Gains Again? Dividend Opportunities
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...
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Dividend Opportunities August 20, 2014
Could These Buyback Machines See Triple-Digit Gains Again?

By Christian Hudspeth

Corporate America has been getting creative with how they reward shareholders.

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 2017."

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 past.

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 road.

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 shareholders.

You can see what I found in the table below.

Company (Symbol) Dividend
Yield
Trailing 12-Month 
Share Repurchases
5-Year
Total Return
Apple (Nasdaq: AAPL)2.3%$43.9 B391.8%
Union Pacific (NYSE: UNP)2.1%$2.5 B337.4%
Home Depot (NYSE: HD)3.1%$7.5 B308.9%
FedEx Corp (NYSE: FDX)0.5%$4.9 B190.8%
Cisco (Nasdaq: CSCO)1.8%$9.2 B48.1%
S&P 500 Index1.9%N/A117.1%
Source: Bloomberg

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 involved:

      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 names and ticker symbols of these stocks as well as others, watch this video.

Good investing,

Christian Hudspeth
Dividend Opportunities

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