These Stocks Are Using Buybacks to Unlock Big Gains for Investors

Key Points

• Three companies are aggressively buying back their own stock, and investors should be aware of the reasons why.
• Backed by Wall Street analysts and their bullish sentiment, these stocks might have double-digit upside.
• Fundamentals aligned after the Fed cut interest rates to boost business activity in these sectors.

Over each quarterly announcement coming from companies, investors tend to focus a lot on the net earnings per share (EPS) figure and not a lot on metrics that matter – arguably – just as much. Today, investors have an additional insight into a select few companies that show aggressive new share buyback programs approved by management teams in recent months.

There are two ways that investors typically get a return from investing in stocks: one is capital gains from buying low and selling high, and the other is the dividend income side of the business. But, there’s a third way to generate upside in a stock investment that is more attractive for investors and tax efficient. This third way is through stock buyback programs.

But, before investors determine the benefits of buybacks, a list of these aggressive programs should be kept in mind. Starting with the energy sector, management teams at Marathon Petroleum Co. NYSE: MPC are taking advantage of low oil prices while they last. Then there’s Bank of America Co. NYSE: BAC to squeeze the upside in bond holdings from the financial sector. Finally, consumer staples and their attractiveness are seen in Altria Group Inc. NYSE: MO.

Why Stock Buybacks Are Better Than Dividends for Investors

Let's say there are 10 shares of a company, and an investor owns one. That person has a 10% ownership in the business. Now, management has bought back two shares of the business, and only eight shares are outstanding. That same investor (holding one share) has increased to an ownership rate of 12.5% from the previous 10% without doing any work.

That higher ownership rate is more valuable on a per-share basis (since supply contracted), and that’s how some companies manage to compound the value of their companies without much effort. More than that, there’s a better tax treatment.

Dividends are taxable income for investors, and they are paid with capital already taxed in the business. Stock buybacks don’t carry this double-taxation characteristic that dividends do, further boosting the upside effects and a clear advantage over dividend income.

Marathon Petroleum's Clear Path to Upside

Now that the Federal Reserve (the Fed) has cut interest rates by the most aggressive rate since the financial crisis of 2008, the business cycle is facing a new potential spark higher, which almost always carries higher oil demand. Knowing this, Warren Buffett bought up to 29% of Occidental Petroleum Co. NYSE: OXY before oil broke out.

Buffett is not alone in his bullish view of oil stocks, as Marathon’s management decided to approve a stock buyback program of up to $5 billion this quarter, representing roughly 8.8% of the company’s market capitalization for an aggressive buyback.

Buybacks also mean insiders think the stock is relatively cheap enough to buy at current levels. Wall Street analysts would agree with this fact. The consensus price target for Marathon Petroleum stock today is set at $196.1 a share, which calls for up to 13.2% upside from today’s stock price.

Higher Bond Prices Could Propel Bank of America Stock to New Heights

Management knows that, which is why they approved up to $25 billion in capital to be used for stock buybacks, which also represents approximately 8% of the bank’s market capitalization today. Here’s why that decision might have been made.

As interest rates come down, bond prices increase, and Bank of America’s financials show the bank is holding up to $368.1 billion in treasury bonds. Knowing that these bonds could significantly go up in value, therefore boosting the bank’s valuation, analysts at Oppenheimer decided to boost the stock’s price target up to $49 a share for a 22.8% upside from today’s price. Management seems to be on the same page when it comes to the potential run this stock can have in the coming months.

New Price Target Boosts for Altria Stock

Apart from management at Altria approving a stock buyback program of up to $1 billion, others on Wall Street also decided to make their bullish view for the company public. Analysts at Bank of America have now landed on a $57 a share price target for Altria Group stock, calling for as much as 14.2% upside from where it trades today.

More than that, institutional buyers like Legal & General Group boosted their net holdings in Altria stock by 1.6% as of August 2024. This may not seem like much on a percentage basis. Still, it now nets their investment at up to $562.8 million for nearly 1% ownership in the company.

The picture wouldn’t be complete without investors knowing how Altria stock is valued compared to the rest of the staples sector. Trading at a P/E ratio of 10.5x today, the stock is at a 50% discount to the staples sector’s average valuation of 20.5x today. This is what management saw as justification for the buybacks and what investors should consider as well.