- Exxon Mobil Corporation (NYSE:XOM) — Oil giant launched a new $1o billion large buyback program along with a 4.0% dividend yield
- The Allstate Corporation (NYSE:ALL) — The insurer announced a new $5 billion buyback program as the stock offers a 2.35% yield
- HP Inc. (NYSE:HPQ) — The computer maker has a decent 2.31% yield as well as a hefty, consistent buyback program
- Intel Corporation (NASDAQ:INTC) — This semiconductor maker has a 3.0% dividend yield as well as a steady buyback program
- Ameriprise Financial (NYSE:AMP) — This financial services firm has a 1.52% dividend yield with a significant repurchase program
- Marathon Oil and Gas Corporation (NYSE:MRO) — With its $3 billion buyback program and its 1% dividend yield, the stock is a “buy”
- Oracle Corporation (NYSE:ORCL) — The 1.6% yield and huge buyback program make the stock very attractive
These seven undervalued stocks are worth buying since they are dedicated to returning capital to shareholders through large buyback programs. This is through both dividend payments that are generous and share repurchases. The repurchases reduce shares outstanding, which has three immediate effects.
To begin with, it increases the remaining shareholders’ stake in the company. This allows them to gain a bigger portion of any shareholder capital returns, including spin-offs, dividends and rights offerings.
As well, a stock repurchase ultimately allows the company to make a higher dividend per share payment in the future for the same cost as before.
And, the smaller number of shares outstanding automatically increases earnings per share. Another major effect of share repurchases is that the stock price tends to rise as the company soaks up demand from selling shareholders.
Let’s dive in and look at these undervalued stocks.
|XOM||Exxon Mobil Corporation||$87.96|
|ALL||The Allstate Corporation||$143.26|
|MRO||Marathon Oil and Gas Corporation||$27.65|
Undervalued Stocks: Exxon Mobil Corporation (XOM)
Market Capitalization: $370.5 billion
Exxon pays $3.52 per share in dividends, giving the XOM stock a dividend yield of 4.0% at yesterday’s closing price of $87.96. Morningstar indicates that the average yield over the last 12 months was 3.95%.
Moreover, the company has decided to initiate a new $10 billion share buyback program, on top of its generous dividend payments. This is also on top of Exxon’s paying down large amounts of its debt.
This is a direct result of the company’s free cash flow (FCF). Last year it generated almost $47.3 billion in cash flow from operations, including asset sales. After deducting $16.595 billion in capital expenditures (capex), its free cash flow was $30.5 billion.
Given its market cap of $370.5 billion, that works out to an FCF yield of 8.2%. That is double the payout of the 4.0% dividend yield to shareholders. As well, the $10 billion share buyback program is worth about 2.70% of its market valuation. This makes the total yield to shareholders worth 6.70% of the company’s market value.
The Allstate Corporation (ALL)
Market Cap: $39.5 billion
Allstate, the large property and casualty insurance company based in Chicago, pays an annual dividend of $3.40 per share, which works out to an annual yield of 2.40%. In the last 12 months, the average yield was 2.35%, and 1.96% over the last five years, according to Morningstar. This implies that if ALL stock were to rise to reach the average yield in the past five years, it would reach $173.47 (i.e., $4.30/0.019). This is 22.1% higher than the present price today of $142.00 per share.
Last year the company spent $3.3 billion in share repurchases, which works out to about 8.35% of its $39.5 billion in market value. So, combined with its 2.40% dividend yield, investors stand to make a total yield of over 10% in shareholder returns. This is the amount of capital the company is returning to shareholders through dividends and buybacks.
For example, in the company’s fourth-quarter slide presentation, it said that it had reduced common shares outstanding by 7.8% over the last 12 months. If Allstate keeps that up this year, the total yield for shareholders will be 10.2% (i.e., 2.4% dividend yield plus 7.8% buyback yield).
Undervalued Stocks: HP Inc. (HPQ)
Market Cap: $41.5 billion
HP, the imaging and printing products company, now pays an annual dividend of $1.00 per share, giving HPQ stock a 2.54% dividend yield. This is actually higher than the average 2.31% yield in the last 12 months, according to Morningstar.
Not only that, the company has been consistently raising its dividend per share every four quarters and investors can expect this to continue, given the company’s ample free cash flow (FCF).
On Feb. 28, HP announced that for the quarter ending Jan. 31, it produced cash provided by operating activities of $1.7 billion and FCF of $1.4 billion. This funded the company’s dividend payments, share buybacks and debt repayments.
For example, based on HP’s slide deck, it spent $271 million on dividends, $1.5 billion on share repurchases, as well as $3.7 billion in net debt repayments. The share repurchase activity works out to 3.68% of its $40.8 billion market valuation.
As a result, the buyback yield plus the 2.31% dividend yield works out to about a 6.0% total yield to shareholders. That provides a very good potential ROI for most investors in HPQ stock. No wonder Warren Buffett, who likes companies with dividends and buyback programs, recently took a large 11.4% stake in the company.
Intel Corporation (INTC)
Market Cap: $196 billion
Based on Intel’s annual $1.46 dividend per share, INTC stock has a 3.05% dividend yield at today’s price of $48.11. This is about even with its average 3.02% yield over the last 12 months, according to Morningstar. However, over the last five years, INTC stock has had an average yield of 2.48%. This implies that the price could rise to $58.87 per share or 22.8% higher (i.e., $1.46/0.248), if it were to rise to the historical average yield.
On top of this, Intel has a large share buyback program. Last year the company produced $11.3 billion in FCF and used $2.4 billion of this to repurchase 39.5 million shares of stock. Given its $196 billion market value, this works out to a buyback yield of 1.22%. And, it brings the total yield to shareholders over 4.0%, including the 3.0% dividend yield.
That’s a decent return for most investors, especially since it is much higher than they can earn leaving money in the bank. That is especially the case if the INTC rises 22% more to reach its average historical dividend yield.
Undervalued Stocks: Ameriprise Financial (AMP)
Market Cap: $32.9 billion
Ameriprise, a financial products and wealth management company pays out an annual dividend of $4.52 per share. At yesterday’s closing price just pennies above$300, this gives AMP stock a dividend yield of 1.52%, about even with its average of 1.56% over the last 12 months. However, it’s lower than the 2.28% average yield over the last 5 years.
Moreover, the company is very profitable and it can fund a large share buyback program. With its year-end earnings announcement, the company said it would fund $3.0 billion in share repurchases through March 31, 2024. In Q4 2021, it bought back $499 million, which puts it on a $2 billion annual repurchase rate. This works out to 6.07% of its $32.9 billion market valuation.
This means that with the 1.52% dividend yield and the 6.07% buyback yield, the total yield to shareholders is about 7.6%. That is a very good return for most investors. In fact, Morningstar reported that the average total yield over the last 12 months was 7.88%.
Marathon Oil and Gas (MRO)
Market Cap: $19.2 billion
Marathon has been raising its quarterly dividends by a penny each quarter and now has an annual run rate payment of 28 cents per share. This gives it an annual yield of 1.05%. Given that the dividend is likely to keep rising each quarter due to higher oil and gas revenue, investors can expect to have a higher dividend yield.
Moreover, based on its huge and growing free cash flow (FCF), Marathon can afford its large $3 billion share buyback program. That works out to 15.6% of the company’s large $19.2 billion market valuation. So this is a very generous buyback program. That is especially so compared to other stocks in this list of undervalued stocks with dividends and buybacks.
For example, its FCF in Q4 was $898 million. That works out to an annualized rate of almost $3.6 billion. That is more than its buyback program of $3.1 billion and also the cost of its dividends of about $205 million.
This will likely help the stock move higher as investors realize that its large dividend and buyback program are both affordable and very generous for its shareholders.
Undervalued Stocks: Oracle Corp (ORCL)
Market Cap: $212.3 billion
Oracle pays an annual dividend of $1.28 per share, giving it a yield of 1.61%, based on a 32 cents per quarter payment. This has been the same payment for the past five quarters.
Typically, the company will raise its quarterly dividend after five quarters. This implies that the company might be getting ready to raise its quarterly dividend in its next reporting cycle. That will likely happen in mid-June 2022.
Last quarter the company spent $600 million in share repurchases of 7 million shares. That works out to an annual rate of $2.4 billion or about 1.1% of its market valuation. This is based on its fast-growing business, especially its cloud division, which represents about 26.7% of its total revenue as of Q4. Its free cash flow (FCF) last quarter was $6.59 billion, which is more than enough to fund the $600 million in share buybacks.
As a result, investors can expect the stock to reflect its healthy dividend and buyback programs over the long run.
On the date of publication, Mark Hake did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.