As a result of the financial crisis in 2009, interest rates began to pull back. To date, money has never been cheaper. Many companies such as 3M or McDonald’s use the low interest rates for borrowing to buy back their own shares on an unprecedented scale. Share buybacks are actually intended as a boon for shareholders, because with fewer shares in circulation, every remaining share gets a larger share of profit and dividends. However, massive share buybacks falsify key indicators such as earnings per share. Many shareholders are in the dark as to whether the increase in earnings per share is based on real earnings growth or just on share buybacks. The resulting uncertainty manifests itself in articles and videos in which the share buybacks of individual companies are sometimes denounced. This is of little help for a serious fundamental analysis.
The stock finder now has the solution ready. In a fully updated chart, you can now see the share of share buybacks in the earnings increase per share. At a glance it becomes clear what role share buybacks play in a company. So McDonald’s repurchased so many shares in 2016 that earnings per share rose by 48 cents just for that reason alone. The 64 cents increase in earnings per share was largely due to share buybacks!
The stock finder is doing pioneering work here too, because, as far as I know, this essential information has so far not shown a research tool, however expensive.
Further examples of massive share buybacks and their effects can be found in popular dividend stocks such as 3M. In 2018, 3M was able to increase the earnings per share adjusted for the US tax reform only by modest 9 US cents per share thanks to share buybacks. Without share buybacks, 3M should have announced a $ 7 drop in earnings per share. In 2015, the increase in earnings per share was also exclusively due to share buybacks:
But also with high flyers like Apple Share buybacks play a major role in glossing over key figures per share. Since 2014, the increase in earnings per share has been largely attributable to share buybacks:
Dividends are out – share buybacks are in
In the early 1980s, share buybacks were not an issue in the United States. US companies shared their profits almost exclusively through dividends. This changed significantly in the United States from 1982 onwards when share buybacks on the stock exchange were permitted.
As early as 1985, shares were bought back in the amount of more than half of the dividends distributed. However, it should take until 1997 for the volume of share buybacks to exceed the volume of dividends distributed. In 2018, the volume of share buybacks exceeded that of dividends by over 50 percent! Today, US companies primarily share (or even incur debt) in, company profits through share buybacks. Dividends only play the second fiddle. In line with this statement, 43 percent of US companies paid dividends in 2018, but 53 percent of companies bought back their own shares.
Share buybacks and dividends are not an either or. As you saw from the introductory examples from McDonald’s, 3M and Apple, many dividend payers buy back their own shares in parallel. The importance of share buybacks is also increasing outside of the USA in Europe and Asia.
Many shareholders and especially fans of a dividend strategy is not aware of the importance of share buybacks or their impact on their investments.
When the balance sheet overflows with own shares
In the case of share buybacks, the shares can either be canceled (i.e. canceled) for all times or accounted for in order to be able to issue the shares again later. If the shares are accounted for, they accumulate on the balance sheet. Over the years, the sum of some companies has grown to an impressive size. In extreme cases, the balance sheet value of the repurchased treasury shares even exceeds the balance sheet value of the company many times over. This is the case with Texas Instruments, for example, where the company has assets of $ 17.3 billion (goodwill + cash + securities + core assets). At $ 34.5 billion, the shares bought back (treasury stocks) almost double the company’s value! The stock finder graphically presents this surprising constellation:
Companies with the most own shares
As a treat here are the 30 companies with the most own shares on the balance sheet. The column “Cf. to balance sheet total ”indicates the relation between the balance sheet total and the balance sheet item“ treasury stock ”. 100 percent means that both sizes are identical. The leader is the Waters Corporation, whose balance sheet item “Treasury shares” corresponds to a proud 330 percent of the total assets. This position “treasury shares” can be larger than the total balance sheet total because it is negative and thus reduces the balance sheet total. Well-known names such as Illinois Tool Works, McDonald’s or Procter & Gamble are also included in the list.
|Isin||Surname||country||Total assets [Mrd. €]||Own shares position [Mrd. €]||See total assets||dividend|
|US9418481035||Waters Corporation||United States||2,667||8,789||330%|
|US1773761002||Citrix Systems Inc||United States||4,331||11.132||257%||1.0%|
|US8825081040||Texas Instruments Inc||United States||17,283||36.002||208%||2.7%|
|US62944T1051||NVR Inc||United States||3,888||7,813||201%|
|US2786421030||Ebay Inc||United States||18.929||34,946||185%||1.3%|
|US5926881054||Mettler Toledo||United States||2,886||4,730||164%|
|US5261071071||Lennox International||United States||2,128||3,412||160%||1.4%|
|US4612021034||Intuit Inc||United States||7,764||11.929||154%||0.7%|
|IL0010824113||Check Point Software Tech||Israel||5,621||8,410||150%|
|US45168D1046||IDEXX Laboratories||United States||1,886||2,788||148%|
|US4523081093||Illinois Tool Works||United States||14.149||19.680||139%||2.4%|
|US0758961009||Bed Bath & Beyond Inc||United States||7,791||10.716||138%||8.4%|
|US09857L1089||Booking Holdings||United States||17,862||24.115||135%|
|US5801351017||MC Donalds||United States||50,568||67.134||133%||2.5%|
|US78409V1044||S&P Global||United States||10,463||13.329||127%||0.8%|
|US61174X1090||Monster Beverage Corp.||United States||4,881||5,799||119%|
|US4370761029||Home Depot Inc||United States||58.737||65,793||112%||2.3%|
|US4592001014||IBM Corp.||United States||153.403||169,437||110%||5.0%|
|US0382221051||Applied Materials Inc||United States||21.815||23,995||110%||1.5%|
|US3848021040||W.W. Grainger||United States||7,177||7,720||108%||1.8%|
|US55354G1004||MSCI Inc||United States||3,912||3,939||101%||0.9%|
|US5128071082||Lam Research Corp.||United States||12,939||12,919||100%||1.6%|
|US7739031091||Rockwell Automation||United States||6,666||6.522||98%||1.8%|
|US7181721090||Philip Morris International||United States||37,494||35.146||94%||6.3%|
|US7427181091||Procter & Gamble||United States||118.560||105,823||89%||2.6%|
|US7512121010||Ralph Lauren||United States||7,280||5,778||79%||3.3%|
|US67018T1051||Nu Skin Enterprises||United States||1,746||1,384||79%||3.8%|
It is also interesting to note that most of these companies also distribute a dividend, some of which is stately.
Are share buybacks bad?
Anyone who acts on the stock exchange according to the motto “only cash is true” and distrusts long-term price gains will be suspicious of the loss of meaning of the dividend. Suspicion is heightened when it is reported that companies are financing share buybacks through new debt
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