Investors tend to focus on two significant aspects of their stock holdings, especially when measuring whether they're winning or losing. One is undeniably price appreciation—or the lack of it—and another is whether they are getting paid a relatively steady dividend.
However, there is an often forgotten third aspect to measure your winning stocks. When management decides to buy back stock, the magic begins.
Warren Buffett is known for investing in great businesses before they get big. By the time these behemoths, like The Coca-Cola Co. (NYSE: KO), start buying back stock, early shareholders like Buffett get the bulk of the benefit.
This is why you should watch stocks like eBay Inc. (NASDAQ: EBAY), Ross Stores Inc. (NYSE: ROST), and even Simon Property Group Inc. (NYSE: SPG) to buy back a good chunk of shares today.
Stock Buybacks: It's Basically Free Money
Most investors get a good feeling when they receive dividend payouts; however, this is far from the most efficient way of being rewarded. Because dividends come from a company's free cash flow (operating cash flow minus capital expenditures), the government taxes that money.
With some minor exceptions, when you receive your dividend payment, you will also be taxed under ordinary income rates. Why would you pay a double tax on money that should instead be invested at a decent rate of return and compound?
A better, more efficient way to get rewarded as a shareholder is through stock buybacks. When management buys back stock, the amount of shares outstanding gets reduced. In other words, you now own a bigger slice of the same pie!
Ideally, you would be invested in a growing pie, like the stocks mentioned here today.
eBay is Just Built Different
While most technology stocks keep making new all-time highs, eBay is far from the upper-class Nvidia Co. (NASDAQ: NVDA) finds itself in. Far from its all-time high price, eBay management understands that the stock may be undervalued today, which is one reason to buy back stock.
Analysts at Barclays (NYSE: BCS) believe eBay stock could go as high as $61 a share, calling for a rally of up to 17% from today's prices. Management seems not alone in thinking the stock is cheap today, which is why 8.1% of total shares will be repurchased.
But that's not all; Fisher Asset Management also came in to buy the stock. By upping their stake by 43.8% this month, representing a transaction of roughly $163,000, the bets are off for this stock to make its way up.
Could the Nvidia rally contagion spread over to eBay? Maybe, though management and analysts already see the writing on the wall.
A Retailer Worth Buying
Ross Stores management sees the high potential in buying its own stock. You see, the company generates an average return on investment capital (ROIC) rate of over 12%. This means that all capital used to buy back stock is set to potentially get a rate of return over 12%.
This is the stuff investors like Buffett love since the value of the business is now set to compound on itself. By announcing a 4.3% buyback, you can expect up to $2.1 billion to be reinvested into Ross stock.
Because share buybacks reduce the number of shares outstanding, earnings per share (EPS) also increase. Given this, analyst projections for 10% EPS growth in the next 12 months could be pushed higher after these buybacks.
More than that, analysts at The Goldman Sachs Group Inc. (NYSE: GS) see a valuation for Ross as high as $163 a share. The stock would need to rally by 12% to prove them right. With potential interest rate cuts coming from the Federal Reserve (the Fed), it isn't too far-fetched to imagine consumer activity will come in to take Ross' EPS much higher.
Get the Best of Both Worlds Here
Now for the double whammy: Simon Property Group is the stock that offers the most efficient way to receive dividends and a potential discount based on management's willingness to buy back stock today.
Being part of real estate investment trusts (REITs), Simon Property gets a small break from Uncle Sam regarding how much tax it needs to pay on its rental revenue, which funds your 5.2% dividend.
But even after a 50% rally in the past couple of quarters, management still thinks the stock could go much higher. This is why up to 4.2% of outstanding shares will be bought back in the coming months. No wonder those at Piper Sandler Companies (NYSE: PIPR) see an upside of as much as 15% in their $172 price target.
