Securities and Exchange Commissioner Robert Jackson Jr. gave a speech June 11 in Washington D.C. In it, he outlined the reasons why the securities watchdog is overhauling the rules for stock buybacks; the first time in 15 years.
To understand what’s happening in this area, Jackson’s office looked more closely at 385 stock buybacks over the last fifteen months. A big red flag according to Jackson is that a lot of executives use stock buybacks as a way for them to take profits.
“What did surprise us, however, was how commonplace it is for executives to use buybacks as a chance to cash out. In half of the buybacks we studied, at least one executive sold shares in the month following the buyback announcement,” Jackson told the audience. “In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell.”
It’s a big reason why I’ve never been a fan of stock buybacks.
With nine years into a bull market and interest rates rising, you would think companies would be doing fewer stock buybacks, but the opposite is happening.
So, if you’re going to invest in stocks doing big stock buybacks, at least consider these seven debt-free companies because they’re using free cash flow, not debt, to make the purchases.
Companies Doing Big Stock Buybacks: Monster Beverage (MNST)
CNBC’s Jim Cramer might not like Monster Beverage (NASDAQ:MNST), the largest energy-drink maker with 43% market share, but that doesn’t mean you shouldn’t.
Cramer doesn’t like the fact that MNST missed Q1 2018 earnings by a penny. That’s hardly worth getting your shorts in a knot. Sure, gross margins in the quarter were off by 420 basis points to 60.6%. However, it still managed to grow operating profits by 5.9% year-over-year.
Even better, it grew earnings-per-share 23.1% in the quarter to 38 cents from 31 cents a share on the back of stock buybacks.
In the first quarter, it repurchased 4.3 million shares for $249.9 million. On May 30, it announced a new $500 million share repurchase program, double the previous authorization.
Whatever weakness Cramer perceives there to be, its share repurchases will help maintain a floor on its share price. With $511 million in cash and no debt, Monster Beverage is positioned for rising interest rates.
Companies Doing Big Stock Buybacks: Facebook (FB)
I said it needed to up its buyback game and Facebook (NASDAQ:FB) listened.
On April 25, the social media giant announced its first-quarter earnings. They were outstanding with revenues 49% higher year-over-year generating 46% operating margins, 500 basis points higher than last year and earnings-per-share that were 63% higher than in Q1 2017.
At the same time it released its earnings, Facebook announced that it had increased its share repurchase authorization by $9 billion on top of the $6 billion plan it’s had in place since November 2016. At the end of March, it had $2 billion left on the original plan, so it’s now prepared to buy back $11 billion of its stock.
“So, far in 2018, Facebook shares have traded between a low of $150.75 and a high of $195.32, a midpoint of $173.04,” I wrote April 16. “With $4 billion left on its share repurchase program and trading below its midpoint despite the post-Congress rally, Facebook has plenty of money in the bank, lots of free cash flow and no reason not to up its buyback game.”
In the first quarter, it paid $173.64 a share to buy back 11 million shares. Those shares now trade around $202, a 16% return on its investment in just three months.
With $44 billion in cash and marketable securities and no debt, it ought to be buying $5 billion a quarter moving forward given the cash it’s throwing off.
For shareholder’s sake, I hope it continues to pile on the stock buybacks.
Companies Doing Big Stock Buybacks: T. Rowe Price (TROW)
A new report out from T. Rowe Price Group (NASDAQ:TROW) examining the investment behaviors of the LGBTQ community is perfectly timed given June is Pride month.
I mention this because it demonstrates that TROW is eager to serve those communities currently underserved in the investment marketplace and that desire leads to growth and profits, the key ingredients necessary for stock buybacks.
In April, T. Rowe Price added 10 million shares to its share repurchase program bringing the number of shares authorized for repurchase to 21 million.
Business is good at T. Rowe Price — revenues grew 17.7% to $1.33 billion, while earnings-per-share rose 14.9% over a year earlier — giving it over $1 billion in average assets under management, 21.3% higher than in Q1 2017.
Some of that is higher stock prices, but $11.3 billion was net cash inflows during the quarter. Net inflows, as opposed to outflows, it was what you want to see every quarter.
During the first quarter, it repurchased 2.9 million shares, or 1.2%, of its stock at an average price of $106.84, 13.7% below where TROW is currently trading.
I look for big things from one of the best-performing investment managers in the business.
Companies Doing Big Stock Buybacks: Align Technology (ALGN)
I’d never heard of Align Technology (NASDAQ:ALGN) until a couple of years ago when my dentist mentioned the company’s Invisalign clear plastic orthodontic product. She thought both my wife and I might be interested in straightening our teeth.
Although we didn’t bite (bad pun), it entered my sphere of consciousness; although I’ve never recommended its stock — until now — I’ve followed along as the business expanded into China, the Holy Grail of growth.
Louis Navellier had good things to say about Align Technology last October suggesting that ALGN stock still had plenty of room to gallop despite YTD gains of more than 100% in less than ten months.
When you’re right, you’re right. It’s up 83% since then and it’s looking unstoppable.
The company expects to grow its free cash flow by 20%-25% annually over the next three to five years, which means it should have plenty to carry out stock buybacks.
In May, Align Technology boosted its share repurchase program by $600 million; it now has $700 million in authorized buybacks. It expects revenue growth of at least 20% in the quarters ahead, five percentage points higher than its previous target.
Longtime ALGN shareholders have reason to smile.
Companies Doing Big Stock Buybacks: Lululemon (LULU)
Advent International, the long-time private equity investor in Lululemon (NASDAQ:LULU) — it first invested in LULU in 2005 in partnership with a second private equity firm buying a 48% stake in the apparel company for CAD$108 million — is finally starting to unwind its ownership interest after 13 years.
On June 7, 2018, Lululemon announced that it was buying back 3.3 million of Advent’s shares as part of the company’s $800 million share repurchase program, of which $799 million was still outstanding as of April 29.
In addition to the 3.3 million shares that Lululemon is buying, Advent sold another 6.7 million shares on the open market leaving it with 10.1 million shares or about 7.4% of the company.
“We are extremely proud of our partnership with Lululemon, which spans back to our first investment in 2005,” said David Mussafer, Chairman and Managing Partner at Advent International and Lead Director of Lululemon’s Board of Directors. “Today’s partial sale is consistent with our planned monetization of our interest in Lululemon.”
Do not take Advent’s exit as an indication of weakness. Thirteen years is a lifetime for private equity. Now’s the right time to move on.
I’ve been a fan of LULU for a long time; I believe the brand’s best days are still ahead of it.
Companies Doing Big Stock Buybacks: Robert Half (RHI)
The unemployment rate in the U.S. hit an 18-year low in May at 3.8% leaving staffing firms like Robert Half International (NYSE:RHI) with the enviable task of finding qualified employees in a tight job market.
It’s not surprising then that Robert Half’s stock is up 27% YTD through June 20.
The company’s Q1 2018 earnings beat analyst expectation on both the top- and bottom-line. Revenues increased by 8% in the first quarter to $1.4 billion, $38 million higher than the consensus estimate. On the bottom line, Robert Half’s earnings were $0.80-per-share, 7 cents higher than the estimate and 29% higher than a year earlier.
All six of its operating segments showed revenue increases in the first quarter with the biggest in its finance and accounting business, which grew 17.2%.
If you like to invest in company’s with high return on invested capital, Robert Half’s was 35% in the quarter.
In February, Robert Half increased its share repurchase plan by 10 million, increasing the amount available to buy back by almost five-fold to 12.3 million.
That suggests it’s very confident about the future.
Companies Doing Big Stock Buybacks: Five Below (FIVE)
If you owned Five Below (NASDAQ:FIVE) June 5, the day before the discount retailer announced its first-quarter earnings, I’m confident you’re very happy two weeks later.
FIVE jumped 22% on June 7 as a result of a strong earnings report that saw it beat sales and earnings estimates, while also providing Q2 2018 guidance that was higher than analyst estimates.
With revenues and earnings increasing by 27% and 160% over last year, Five Below is definitely on a roll.
I recently called Five Below one of the seven retail stocks to own other than Amazon (NASDAQ:AMZN), not to mention one of the best stocks to own for the next decade.
I really like its $5 or less business model that’s focused on the teen and pre-teen market.
“Five Below is a growth machine — plus it makes a lot of money,” I wrote June 6. “The typical store is 8,000 square feet, requires a reasonable $300,000 investment, generates $2.1 million in first-year sales, and averages an annual $300,000 to $450,000 four-wall EBITDA contribution for a 100% to 150% return on investment.”
As retail stocks go, FIVE should go at the top of your list.
Oh, and by the way, Five Below announced a $100 million share repurchase program in March, which I believe is the first time it has done so since becoming a public company in 2013.
As of this writing, Will Ashworth did not hold a position in any of the aforementioned securities.
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