Stock buybacks are positive for equity investors for two main reasons. First, as another InvestorPlace columnist, Thomas Niel, pointed out, by lowering the numbers of companies’ total shares outstanding, buybacks push up companies’ earnings per share totals.
Consequently, the bottom lines of the firms that carry out share buybacks are inflated. That’s because buybacks make firms’ earnings per share higher than it would be if it was entirely based on their business operations. And, since EPS is used to calculate stocks’ price-earnings ratios, utilized by many investors to determine whether shares are expensive, stock buybacks can make equities cheaper.
As a result, the stocks of companies that carry out such buybacks could attract more buyers than they otherwise would.
Finally, by creating additional buying demand for stocks, share buybacks can push stock prices higher.
As another InvestorPlace columnist, Will Ashworth, pointed out, however, share buybacks can also sometimes be negative. “Buybacks have hurt numerous large companies because that money could have been used to pay down debt and to save for a rainy day,” he wrote.
Ashworth is right, so it’s a good idea to invest in companies that are carrying out stock buybacks, have low debt and are highly unlikely to encounter a truly “rainy day” anytime soon. Here are three that meet that criteria.
BlackBerry (BB)
While successfully transforming itself from a mobile phone maker to an IT security and secure operating-system vendor, BlackBerry launched multiple lawsuits against major tech companies for violating its patents. In early 2018, it initiated such a lawsuit against Facebook (NASDAQ:FB).
On Jan. 15, BlackBerry announced that it had finally settled that lawsuit. In 2017, shortly after it was awarded $815 million from Qualcomm (NASDAQ:QCOM) (the amount was later raised to more than $900 million), BlackBerry began repurchasing up to 31 million of its shares, or 6.4% of its public float.
Since the settlement with Facebook is likely to be much larger due to Facebook’s large cash reserves and the importance of the messaging technologies in dispute to the social network’s business, I believe that BlackBerry will buy back many more shares of BB stock in coming months.
Further, unlike in 2017, BlackBerry is now solidly cash-flow positive, as its net cash from operating activities in its third quarter came in at $29 million. As of its last reported quarter, it had just $589 million of debt and $674 million of cash.
And BlackBerry’s future is looking very bright, as the demand for cybersecurity products remains quite strong. Most of the leading EV manufacturers have agreed to utilize Blackberry’s highly secure QNX operating system, the company says.
If that isn’t enough, BlackBerry recently began partnering with Amazon (NASDAQ:AMZN) to develop a “new intelligent vehicle data platform,” and the IT security company recently bolstered its cash reserves by agreeing to sell 90 of its patents to China’s Huawei.
JPMorgan Chase & Co. (JPM)
Last month, JPMorgan, one of the world’s largest banks, stated that it would look to buy back $30 billion of JPM stock. That’s a very big number, even though the bank has a market capitalization of over $420 billion.
In line with my previous bullishness on large banks, JPMorgan recently reported excellent fourth-quarter results. The bank’s top line rose 3.4% year-over-year and beat analysts’ average outlook by $1.42 billion. EPS came in at $3.79 versus the mean outlook of $2.62. Additionally, it reported that its provision for credit losses had fallen by $1.89 billion versus the previous quarter. The bank has a staggering $1.33 trillion of cash, versus $630.3 billion of debt.
Going forward, JPM stock should continue to benefit from strong equity markets, improving conditions for small businesses, better-than-expected credit trends, and the powerful housing market. In coming months, the banking giant should also get a boost from rising interest rates.
Micron Technology (MU)
On Jan. 7, the chip maker said that it was committed to spending at least 50% of its free cash flow on buying back MU stock. Last year, the company’s free cash flow was just $83 million. But in 2018 and 2019, before the novel-coronavirus pandemic, its free cash flow came in at $8.5 billion and $3.4 billion, respectively.
Given the company’s many positive drivers (which I’ll discuss below) and the likely end of the pandemic by the end of the summer, I expect the company’s free cash flow to easily exceed $2 billion in 2021.
Micron recently stated that it was benefiting from data centers’ increased use of artificial intelligence. Moreover, the chip maker expects data centers’ utilization of “cloud and AI” to generate growth for the company over the long term.
Micron reported very strong fiscal Q1 results on Jan. 7 as its operating income soared 64% year-over-year to $973 million, while its gross margin increased to 31% from 27.3% during the same period a year earlier. As of the end of its last reported quarter, Micron’s net debt stood at only $180 million, versus its revenue over the preceding 12 months of $22 billion.
I expect these new, positive catalysts to prevent the kind of boom-and-bust cycles that the company has experienced in the past.
On the date of publication, Larry Ramer held a long position in BlackBerry.
Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Among his highly successful contrarian picks have been solar stocks, Roku, and Snap. You can reach him on StockTwits at @larryramer. Larry began writing columns for InvestorPlace in 2015.
