3 Dividend Stocks Juicing Returns With Buybacks

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There will always be a debate over which is a better method for returning cash to shareholders — dividends or stock buybacks. Happily for income investors hunting for dividend stocks to buy, there are plenty of companies offering both.

best dividend stocksTrue, dividends have some advantages over stock buybacks. They’re supposed to be a permanent feature of those dividend stocks you care to buy, whereas buybacks can come and go. On the other hand, dividends suffer from being taxed twice — first as corporate earnings, and then again as dividend income.

Each has its pros and cons, but one thing is certain: Dividends and stock buybacks are both at record levels.

Indeed, buybacks and dividends combined hit a new record high of $241.2 billion in the first quarter (the latest available data), according to S&P Dow Jones Indices. The old record of $233.2 billion was set way back in the fourth quarter of 2007 — or right before the financial system started to melt down.

By taking shares out of circulation, buybacks make remaining shares more valuable. Earnings per share increase when there are fewer shares, which gives buybacks an accretive yield all their own. (An accretive yield of, say, 2% means the buyback will lift earnings per share by 2%, which — in theory — goes to shareholders.)

As long as price appreciation does its own part, dividend stocks benefiting from buybacks are almost turbocharged for total return.

The last week alone brought news of three notable dividends stocks initiating or adding to their stock buybacks. Here’s a look at them to help decide if they’re the right dividend stocks to buy:

Dividend Stocks with Buybacks: American Airlines Group (AAL)

american airlines aal stockIn the latest sign that the once-struggling airline industry is on solid financial footing, American Airlines (AAL) said it will buy back $1 billion of its own stock. AAL also said it will start paying a dividend for the first time since 1980. (AAL moved to match a buyback by rival United Continental Holdings (UAL), which isn’t among the dividend stocks in the industry.)

Eight months ago, AAL was in bankruptcy. Cut to today and the world’s largest airline is flying high, as stable fuel costs and higher fares led to a record for profitability in the most recent quarter.

The quarterly payout of 10 cents per share gives AAL stock a forward dividend yield of less than 1%. But before you scoff, consider that the share buyback has an accretive yield to EPS of 3.6%. Analysts’ average price target on AAL stock stands at $51.72. Add in the boost from the dividend and buyback, and AAL stock has an implied total return of almost 29%.

Dividend Stocks with Buybacks: Altria (MO)

altria mo stock tobacco stocksAs a tobacco company, Altria (MO) was already something of a dividend champion. (In fact, it has to be — it’s not like cigarettes are a growth industry.) But MO stock still stands out among large-cap dividends stocks. Few stocks with a market value of $85 billion have a dividend yield of 4.5%.

MO needs to throw off fat dividends to keep its income-investor base happy. It also needs to engage in stock buybacks to keep the bottom line in shape. Financial engineering isn’t an option when you’re in the tobacco business.

With only $53 million left in its current billion-dollar share repurchase program, MO announced another one to run through all of 2015. At the current stock price, the buyback has an accretive yield of less than 1%. Add that to the 4.5% dividend yield and you’ve got something. With an average target price of $43, MO stock has implied total return of nearly 9%. That’s not exactly a smoking hot stock, but it’s not too shabby for a dependable and generous dividend payer.

Dividend Stocks with Buybacks: Johnson & Johnson (JNJ)

NYSE:JNJJohnson & Johnson (JNJ) posted Street-beating quarterly earnings, but a cautious forecast knocked 5 percentage points off JNJ stock over the next three sessions. JNJ’s new drug to treat hepatitis-C helped lift revenue by 9% in the most recent quarter, but JNJ warned that it expects the sales pace to cool off, among other downers.

 JNJ stock is still up more than 12% for the year-to-date, but it the outlook sure spooked the Street. So, naturally, JNJ announced stock buybacks of $5 billion to run indefinitely. JNJ stock — with a market cap of $289 billion — popped more than 1% on the news. Such is the power of buybacks.

True, the buyback is accretive to earnings per share by about 1.6%. Add that to a “meh” dividend yield of 2.7%, however, and the income side of the equation looks a lot more competitive. Based on the $108 price target, the dividend and buyback give JNJ an implied total return of about 11% in the next 12 months or so.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2014/07/dividend-stocks-buybacks/.

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