As we’ve recently reported, buybacks have outperformed the market for nearly twenty years, but Citi analyst Tobias Levkovich thinks this emphasis is misplaced. “It is the consistency of shrinking the share count that appears to be most intriguing since share repurchases alone can be offset by option grants that dilute shareholders or poor acquisitions using stock,” he writes.

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Who is going to issue dividends or shrink the float?

The problem is that determining who is going to release dividends or shrink the share count ahead of time isn’t always obvious. Major investors like Carl Icahn can take a big enough position to have a seat at the table and even less aggressive investors may have a line on what a company’s management is planning, but for investors outside the inner circle there is no obvious way to invest in companies that will have a buyback.

Companies that have cut their shares outstanding every year

Levkovich proposes four methods as starting points, though none of them can guarantee anything. First, he looks at companies that “have cut their shares outstanding every year for the past five years and thus show a propensity to effectively undergo a ‘slow LBO’ such that they may continue to do so.” The idea is that some companies are engaged in a gradual process, and even without knowing how long it will last the odds that the process ended exactly last year are pretty low.

Shrinking Share

A lot of energy companies fit the bill: Levkovich

The second approach is to identify companies that can afford to pay out a one-time dividend worth at least half their current stock price by taking leverage to 7x EBITDA. This lets you know what companies seem well-positioned for such a move. Even if management isn’t interested in a buyback, the steady increase of investor activism means that any company able to do so may be under pressure from major shareholders. Levkovich notes that a lot of energy companies fit the bill, which could mean there is a need for more capital investment in that sector.

He also thinks that an investor could look for companies with low CDs and dividend yields below a set threshold (he uses 2.16 percent), or simply companies with the ability to raise dividends, among other strategies.