UBS Analyst Names Stocks With “Good” Buybacks
August 17, 2016
UBS Strategist Names Top 20 Stocks Buying Back Shares
As the stock market flirts with new all-time highs, analysts are wondering if the equities are about to hit a ceiling. Julian Emanuel, strategist for financial services company UBS, is one such analyst, and he thinks that stock buybacks may be signalling overvaluations across the board.
In a research note, Emanuel anticipates what critics might say in response. (Source: “20 Stocks Engaging in ‘Good’ Buybacks…And Yes, Gilead Made the List,” Barron’s, August 12, 2016.)
“Many would argue that the emphasis on share repurchases is merely a sign of the times,” he writes. “The US economy continues to grow (albeit slowly) while corporates enjoy ample balance sheet flexibility in an entirely unprecedented ultralow interest rate environment.”
This is the traditional argument for why stock buybacks signal a strong economy. Proponents assert that companies can only afford share buybacks in good times because they would not otherwise have the cash or goodwill to do so. However, Emanuel takes these assumptions to task.
“Buyback activity near all-time highs could be considered a potential sign that the current Bull Market is approaching its peak,” he explains. “Management tends to repurchase shares in bull markets when profits are high and balance sheets are flush with cash, while cutting back during recessions (precisely the time they should be buying over the long term).”
What he means is that buybacks tend to be expensive during bull markets. The optimism of a stock market rally buoys stock prices, making them more costly for companies looking to boost shareholder return.
Firms would get better bang for their buck when stock prices are deflated. Emanuel’s call for a market top is also supported by other data. For instance, there were only $376.5 billion worth of stock buybacks this year, down from $478.4 billion last year; that’s a 21% drop-off in just 12 months. Nonetheless, Emanuel believes that some investors should still invest in companies that execute “good” buybacks.
“So which companies represent “good” buyback stocks?” he asks. “According to our (sector neutral) approach, we would focus on the companies that score in the upper 33% in terms of our composite value and quality score (i.e. attractively valued/higher quality) that are actively returning capital to shareholders.”
The 20 stocks meeting those requirements are: Ralph Lauren Corp (NYSE:RL), Time Warner Inc (NYSE:TWX), Twenty-First Century Fox Inc (NASDAQ:FOXA), PepsiCo, Inc (NYSE:PEP), Estee Lauder Companies Inc (NYSE:EL), Tesoro Corporation (NYSE:TSO), XL Group Plc (NYSE:XL), Ameriprise Financial, Inc (NYSE:AMP), Unum Group (NYSE:UNM), Merck & Co., Inc. (NYSE:MRK), AbbVie Inc (NYSE:ABBV), Gilead Sciences, Inc (NASDAQ:GILD), General Dynamics Corp (NYSE:GD), Alaska Air (ALK), United Continental Holdings Inc (NYSE:UAL), Delta Air Lines, Inc. (NYSE:DAL), Oracle Corporation (NYSE:ORCL), eBay Inc (NASDAQ:EBAY), Apple Inc. (NASDAQ:AAPL), and Centurylink Inc (NYSE:CTL).
