Author: David Fried, Fried Asset Management
Disclaimer: David Fried owns BMY in his Covestor High Yield Buybacks model.
As an investor, are you still wondering if you need to be in cash? We hope not.
Here’s our thinking:
You must continue to focus on the comparative value of stocks vs. bonds. You can barely get any interest rate on your cash, with no chance of growth and a good chance of seeing it shrink from inflation. If you buy a stock that gives you that yield or higher, you have a good chance of seeing an increasing dividend and increasing your principal. Even in the last 10 years, when the stock market has been awful (let’s not mince words!), you are not below where you were 10 years ago; you are at or above it. The moral of that story is investors buy equities to grow their money, not just to avoid losing it.
There are a lot of high quality, stable, venerable companies to choose from. Examples are General Mills, Pepsi, UPS, Honeywell, Proctor & Gamble, Home Depot, Kellogg, Mattel, Intel, Merck, Phillip Morris, Bristol Meyers, Johnson & Johnson, AT&T, Verizon and Pitney Bowes. These are companies that are likely to be here in 10 years, worth at least as much as they are today.
Not only are a lot of these companies household names, but many of them are buying back their own shares.
They’re faced with some of the same conditions that individual investors are faced with – they have excess cash that they have been holding (hoarding?) because they felt they might need it during the credit crunch of the recession. Now that credit has loosened a bit, company execs are feeling more confident in deploying that cash. And because the interest rates have been rock-bottom, many companies have even been borrowing additional cash at attractive rates to purchase their own shares.
Big names like Microsoft Corp., PepsiCo Inc. and Hewlett- Packard Co. are taking advantage of low-cost financing to buy back their stock to boost per-share earnings.
After a slowdown since the torrid pace set in 2007, U.S. companies once again have a voracious appetite for their own shares, and have been buying back with vigor.
S&P 500 stock buybacks for the second quarter of 2010 increased 220.9% to $77.64 billion from the record low $24.2 billion registered during the second quarter of 2009. The $77.64 billion in share repurchases represents a 40.5% improvement over the first quarter of 2010, and is the fourth quarter in a row that S&P 500 companies have increased their stock buyback activity (https://blogs.wsj.com/marketbeat/2010/03/19/announced-sp-500-buybacks-surge-in-first-quarter/).
During the second quarter of 2010, 257 companies participated in stock buyback programs, up from 251 in the first quarter of this year and 214 that participated in the fourth quarter of 2009. The largest 2010 Q2 buybacks from S&P 500 companies were accomplished by Wal-Mart, IBM, Microsoft, Procter & Gamble, PepsiCo, Hewlett-Packard, Cisco Systems, DIRECTV, Gilead Sciences, Exxon Mobil, WellPoint, Travelers Cos., Merck & Co., Disney, QUALCOMM, Philip Morris International, Biogen, Medco Health Solutions, McKesson and Genzyme (http://stockpickr.com/thestreet-portfolios/portfolio/top-10-s-p-500-buybacks-of-2010/)
So while cash has given companies the flexibility they needed to react to opportunities (acquisitions, etc.), and to survive a downturn in business, if ever there was a time for solid companies to repurchase, it seems to be now, when shares are devalued, and there is no reward for hoarding cash.
Bottom line: Buybacks are attractive, stock shares are a good value at present, and investors need to keep their eye on the long-term prize – not only today’s yield, but tomorrow’s potential appreciation.
Thank you for using The Buyback Letter as a tool for your investment decisions. And remember, invest for the future—it will be here before you know it.
*Past performance is not a guarantee of future results.
