'Probably the best use of cash': Warren Buffett likes businesses that dole out dividends — but he absolutely loves it when they do this instead. 3 'share cannibals' to watch out for now
Many investors are aware of Warren Buffett’s basic strategy of value investing. The Berkshire Hathaway CEO has a concentrated portfolio of high-quality stocks purchased in moments when they were relatively inexpensive. He also loves dividends.
But investors may bee less aware of Buffett’s penchant for companies that periodically repurchase their own outstanding shares, also known as share buybacks. The reason is simple: buybacks are similar to dividends in that they can provide cash to shareholders. But, if a buyback is executed at an attractive valuation — that is, if the bought-back shares are underpriced — the value of shares held by all remaining shareholders can increase.
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“When a stock can be bought below a business’s value, it is probably the best use of cash,” Buffett said while explaining why he favors buybacks during Berkshire Hathaway’s shareholders meeting in 2004
Here are three companies with attractive buyback programs.
Apple (NASDAQ:AAPL)
Apple, which accounts for around half of Buffett’s portfolio, has repurchased its own shares to the tune of more than $572 billion since 2012, according to Bloomberg. Yahoo! Finance reports the iPhone maker also spent another $18 billion on buybacks recently.
In 2016, Buffett started investing heavily in Apple while the dividend and buyback program was in full swing.
If you’re looking for a consistent buyback and dividend, this $2.8-trillion juggernaut should certainly be on your watch list.
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Alphabet (NASDAQ:GOOGL)
Alphabet is reliably profitable, but has shown no indication of any interest in dividends. It is, however, much more amenable to buybacks.
Google’s parent company has regularly repurchased shares since at least 2018. Alphabet CEO Sundar Pichai announced a massive share buyback program in 2022, worth $70 billion. This program was renewed with another $70 billion in April. That’s one of the largest buyback programs in corporate America, nearly as big as Apple’s $90-billion program announced in March.
Tractor Supply (NASDAQ:TSCO)
Tractor Supply Company isn’t a high-profile tech company like the other two stocks on this list, but it is a generous buyback firm. The Tennessee-based company offers agricultural products through its network of retail stores spread across the country.
The stock’s 2% dividend yield isn’t particularly impressive, however, its buyback program certainly is. Total shares outstanding dipped from 123 million in 2018 to 112 million at the end of 2022. The company’s management expects to deploy $575 million to $675 million in share repurchases in 2023, approximately 2% of the company’s outstanding shares. Forbes Advisor estimates the company’s shareholder yield as a result of buybacks to be above 4%.
The fact that it’s underrated on Wall Street makes it even more appealing. Investors looking for an overlooked buyback story may want to consider adding this stock to their list.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
