Companies started this year with a lot of money, thanks to a large tax cut, and put that money to work in the market.
Specifically, they bought their own stock.
Even Warren Buffett's Berkshire Hathaway has joined the crowd, announcing recently that it has acquired nearly $ 1 billion of its own shares in recent months.
In November, US companies bought a record $ 957 billion of their own shares and were at a rate of $ 1 trillion for the year, according to San Francisco-based TrimTabs Investment Research. the last weeks of December.
Stock repurchases can be a bullish signal. Companies that accumulate packages of their own shares appear to be signaling that they are undervalued and that their business is operating well enough to project future growth.
Part of the fiscal review in late 2017 was an incentive for US companies to bring money home overseas, and that's a big reason for the buyout boom this year. It is a simple and relatively quick way to put that newly repatriated money to work.
Apple, for example, said earlier this year that it would repurchase $ 100 billion of its shares, the largest ever. Cisco announced plans to buy $ 25 billion, while Wells Fargo announced a $ 22.6 billion program.
For Berkshire Hathaway, the move to buy $ 925 million of its stock in the open market was greeted with applause from investors, who pushed their B shares up 5% after the news spread.
In addition to buying stocks, companies can use extra money in their balance sheets to pay off debts, as AT & T has promised to do next year while still paying its dividends. Or they can use it to invest in their business, as Amazon is doing, raising wages and opening two new offices in Virginia and New York. They can also pay directly to shareholders in the form of a dividend.
Acquisitions are another way to use money, and there were almost three dozen megadeals of more than $ 10 billion announced in the United States through the first half of the year, according to Dealogic, a UK-based financial analysis firm.
But repurchases have the added benefit of reducing the overall stock count, which can boost earnings per share (EPS). Some argue that this is a temptation for companies to try to increase their numbers or increase EPS to benefit executives at the time of the bonus. And they do not really boost the economy, which should be the idea behind tax cuts.
There is a darker side to consider: companies are using their extra money to repurchase their stock because they no longer see any useful ideas for the money. When companies have no more profitable ideas, they tend to return the money to their owners, shareholders.
Berkshire has changed its buyback rules earlier this year, giving Buffett and his former lieutenant Charles Munger more freedom to decide if it was time to dive in and buy. Of course, Berkshire has struggled to find other use for its money. He gave up some ideas for acquisitions last year in a case after a bidding war broke out and did not find many companies to buy that are not richly valued.
Buffett has long boosted the idea of buying an asset when trading below its "intrinsic value," which is an estimate of future cash production from a discounted business to the present day. And Berkshire's intrinsic value has grown more than its book value in recent years.
Investors took some comfort by buying back their stock, Berkshire was signaling it was prepared to be disciplined about acquisitions and not spending more on business just because it had money burning a hole in its pocket.
Maybe that's the same sign that other companies are giving.
At Validea, we put together a set of investment models that accompany the strategies deployed by some of the largest investors, including Mr. Buffett. Here are three companies that stand out among the companies that announced repurchases last year.
Biogen Inc. (BIIB-Q) – This biopharmaceutical company has a high score on the models that accompany the styles of Warren Buffett and Peter Lynch, the former portfolio manager of Fidelity. It has an average return on equity over 10 years of 22.7%. Earlier this year, it announced a repurchase of $ 3.5 billion. In the current market assessment, this represents about 4.5% of the company.
Alliance Data Systems Corp.ADS-N) – This action is also very high in the models that accompany Buffett and Lynch. The provider of loyalty programs and marketing data has consistency of long-term profits and high returns on capital and equity. It also has a repurchase plan of $ 500 million, equivalent to approximately 4.6% of its market value at current prices.
Diamond Hill Investment Group (DHIL-Q) – This small stock pays off well on Buffett and Lynch models. The investment adviser and fund manager, who announced a $ 50 million repurchase in September, has a 10-year annual growth rate in profits of 13.5% and a strong free cash flow.
John Reese is the CEO of Validea.com and Validea Capital, manager of an active management ETF. Globe Investor has a distribution agreement with Validea.ca, a premium Canadian stock screen service.