3 Companies Buying Back Stock: Here’s Why They’re Doing It

Key Points

• When investors realize the power of a company buying back its own stock and realize the compounding effects it may have, they'll want to keep these 3 stocks in their portfolios.
• Understanding that, as they trade down near 52-week lows, it makes sense for management to start buying back these names.
• Wall Street analysts and institutional buyers agree that they see a double-digit upside ahead and that there are more reasons to buy the dip.

Whenever investors think of potential upside in the stock market, they typically go with the classic “Buy low and sell high” methodology, which brings on the capital gains aspect of a successful investment. The second most common way investors consider upside in a stock is through dividend payouts, which are attractive when an investment is large enough to offset the tax inefficiencies that come with dividend income.

Dividends are paid from a company’s free cash flow, which is then taxed at the respective corporate level. When investors receive these payments, they are taxed once again at their respective personal brackets. This double-taxation makes dividend income inefficient. It also takes capital away from a company and its ability to reinvest into growth and compounding opportunities.

A third way, not too commonly followed by investors, is when companies start buying back their own stock. This method keeps capital within the business, reinvested and tapped into the effects of compounding, and eliminates the second taxation aspect that dividends carry. Three stocks management thought to be cheap enough to start buying today are Mastercard Inc. NYSE: MA, Kroger Co. NYSE: KR, and even Archer-Daniels-Midland Co. NYSE: ADM.

What’s the Thinking Behind Mastercard Stock Buybacks?

Now that the global economy is heading to a more digitized setup and consumerism has taken on a new scale, stocks in the payment platform arena will likely do well over the coming years, if not decades. This is why, out of all the financial sector players, Mastercard decided to start buying back stock recently.

As of December 2024, Mastercard’s board of directors decided to approve up to $12 billion to be allocated toward buying back stock. This can be taken as a sign that the stock is cheap enough today and expected to trend higher in the coming months.

More than that, this $12 billion would be reinvested back into a business that currently generates up to 55% in return on invested capital (ROIC) rates. This article better explains the importance of ROIC in wealth compounding through a stock investment, but for now, all investors need to know is that the buyback amount sets up Mastercard on a new path to higher prices.

Wall Street analysts agree with this view, especially those from Morgan Stanley. They have reiterated Mastercard stock as an overweight rating and now see its fair valuation being closer to $654 a share as of December 2024. To prove these boosts right, Mastercard would have to rally by as much as 23% from where it trades today.

Management’s Commitment Drew Institutional Buyers to Kroger Stock

After approving a stock buyback program of up to $7.5 billion as of December 2024, which represents up to 16.6% of the company’s market capitalization, institutional investors found this commitment to Kroger stock to be validation for their own buying sprees.

Those at State Street led the way in recent buying activity, as they boosted their holdings by 6.8% to their net positions to a high of $1.9 billion today, or 4.5% ownership in the company. This confidence and commitment to Kroger stock didn’t stop at the buyer level; others on Wall Street were also willing to make their views public.

Analysts from Bank of America recently kept their buy rating on Kroger stock, this time along with a $75 share price target up from their previous $70 valuation. This new target would imply that Kroger could deliver a rally of up to 20.4% from where it trades today.

More than that, this new $7.5 billion buyback would be directly tapped into the company’s ROIC of 14% as of the past 12 months, a better return on this capital than most investors would get by just buying the S&P 500 index and its average return of 6-8% per year.

New Upside is Coming for Archer-Daniels Stock

Most food and beverage companies today have seen their margins contract due to supply constraints in Eastern Europe, resulting from the conflicts between Russia and Ukraine. However, when these conflicts are resolved, supply chains and costs will normalize, bringing stocks like Archer-Daniels back to their former profitability levels.

That's why management was willing to buy back up to 100 million shares in its new program, which represents roughly $5 billion at today's stock price. More than that, Wall Street analyst Snow forecast up to $1.33 in earnings per share (EPS) for the next 12 months in the company, a significant 30% jump from today's $1.03 EPS level.

With this EPS growth forecast in mind, it would make sense to see analysts also land on a consensus price target of up to $60 a share today, which calls for a net upside of roughly 20% from where the stock price is right now. It would make sense for management and analysts to be so bullish on the stock, especially now that it trades at only 68% of its 52-week high.