Warren Buffett’s portfolio is full of buyback opportunities which he calls ‘the best use of cash’. Here are 3 companies with the biggest hidden dividend potential
The fact that the world’s most famous investor, Warren Buffett, appreciates shareholder rewards shouldn’t be surprising. After all, a sizable and predictable return is the whole point of investing.
Buffett takes this philosophy seriously and seeks out companies with the most generous shareholder rewards program. All five of his biggest holdings pay dividends. But they also have something else in common: buybacks.
Stock buybacks or share repurchases could be considered “hidden dividends.” Here’s why Buffett’s portfolio is dominated by companies buying back their own shares and why the Oracle of Omaha regularly buys back Berkshire Hathaway (BRK) shares too.
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Eager to escape the dismal stock market? Unfortunately, “cash is not a safe investment,” says Ray Dalio, founder of the world’s largest hedge fund. “It’s not a safe place because it will be taxed by inflation.” With the consumer price index hitting a 40-year high of 8.6% in May, you’ll need to get creative to find strong returns.
The magic of buybacks
In 2004, Buffett described his thesis on buybacks. “When stock can be bought below a business’s value it is probably the best use of cash,” he told Berkshire Hathaway investors.
A buyback program reduces the number of outstanding shares. That makes each remaining share more valuable. It also means that the company’s annual earnings belong to a smaller group of investors.
Buybacks have other advantages. They’re more tax-efficient than dividends because shareholders receive some value without the need to receive cash. These buyback programs are also a sign of confidence from the company’s management team.
Put simply, a well-executed buyback handsomely rewards shareholders.
These programs have become more popular in recent years. In 2021, S&P 500 companies collectively spent over $1 trillion in buybacks — reducing the stock market’s aggregate share count by 4%. Buybacks could be just as aggressive this year as stocks get cheaper.
Here are some of the most noteworthy buyback programs in 2022.
North America’s largest railroad operator has been buying back shares longer than any other stock on this list. Union Pacific (UNP) has reduced its share count by half since 2006. The stock price is up 827% since then. If you include dividends over that period, the total return is even more impressive.
The company’s ongoing buyback program could reduce outstanding shares by 20% over the next five years. Investors can also expect a steady flow of dividends. After all, the company has paid consistent annual dividends for 123 years. The current yield is roughly 2.5%.
In dollar terms, Apple’s (AAPL) buyback program is the largest one on the market. The company deployed $81 billion to repurchase its shares last year. This year, analysts expect a further $80 to $90 billion program. That would represent 4% of the company’s current market value.
The iPhone maker also pays a modest dividend every year. These lucrative and consistent rewards could be the reason why Apple is the largest holding in Warren Buffett’s portfolio.
The ongoing energy crisis has created a windfall for oil and gas producers across North America. Exxon Mobil (XOM) is at the forefront of this trend. This year, the company tripled its buyback program from $10 billion to $30 billion.
Cash flows have skyrocketed so rapidly, that it’s even caught Washington’s attention. President Joe Biden said, “Exxon made more money than God this year.” Perhaps the buyback program could share some of that heavenly windfall.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.