One of the strategies recommended for 2014 by Goldman Sachs Group Inc (NYSE:GS) is to invest in companies that could deliver returns through hefty buybacks. Taken along with a dividend payout, investors could do well for themselves by investing in these companies, considering that the market is already trading at record highs.
S&P 500 buybacks spending
“We expect S&P 500 (INDEXSP:.INX) share repurchase spending will leap by 35% to nearly $600 billion in 2014. Investors will reward firms that return cash to shareholders. In a fairly valued market, strategies that are not dependent on further P/E multiple expansion become more important,” say Goldman Sachs strategists David J. Kostin, Stuart Kaiser, Amanda Sneider, Ben Snider, Rima Reddy and Aaron Woodside in their outlook for US equities for 2014.
Goldman Sachs Group Inc (NYSE:GS)’s Buyback strategy is represented by their GSTHREPO basket. This basket, as on November 21, 2013, reads as follows:
Seth Klarman Tells His Investors: Central Banks Are Treating Investors Like “Foolish Children”
"Surreal doesn't even begin to describe this moment," Seth Klarman noted in his second-quarter letter to the Baupost Group investors. Commenting on the market developments over the past six months, the value investor stated that events, which would typically occur over an extended time frame, had been compressed into just a few months. He noted Read More
The S&P 500 Buyback index
The S&P 500 Buyback Index measures the top 100 stocks in the index with the highest buyback ratios. Historically, it has returned about 4% better returns compared to the main index, but this year it has outdone itself – it is up nearly 46% whereas the main index is up 30%. (See the chart on the left below). On a five-year basis the returns read 28% and 19% annualized, respectively (chart on the right).
These are very solid returns, indeed. According to this article, companies find it easy to fund buybacks these days because of cheap money, courtesy the Fed’s dollar printing spree.
Companies on the buyback path
Here are some recent buyback announcements that show how companies are taking recourse to their large cash piles to boost returns for shareholders:
- Agilent Technologies Inc. (NYSE:A), $500M
- Novartis AG (ADR) (NYSE:NVS), $5B
- Yahoo! Inc. (NASDAQ:YHOO), additional $5B
- Union Pacific Corporation (NYSE:UNP), $9.5B
- Johnson Controls Inc (NYSE:JCI), additional $3B
- Morgan Stanley (NYSE:MS), depending on Fed approval
Apple: Will it…won’t it?
Apple Inc. (NASDAQ:AAPL) is being hounded by activist investor Carl Icahn to implement a buyback worth $150B, considering its obscene cash hoard. What’s more, Icahn has suggested Apple Inc. (NASDAQ:AAPL) do it by taking on debt if necessary. The jury is out on whether that is advisable, but Icahn can be persuasive as past history shows, so don’t be surprised if Apple makes a buyback to placate Icahn. And that should give Apple shareholders reason to cheer.
All in all, a buyback-cum-dividend strategy for 2014 appears to be eminently workable, but of course, investors should do their due diligence.