As an investor, you're likely familiar with the appeal of dividend stocks, especially when the market gets shaky. Dividends, those regular payouts from a company's profits, offer a tangible return and a sense of stability, particularly when the value declines and dividends grow. But what if I told you there's a "twin" to dividends that's equally, if not more, impactful for your portfolio, particularly in uncertain times?
I'm talking about share buybacks, and a recent Barron's article, "Walmart, Aflac and 8 Other Dividend Aristocrats That Also Wear Buyback Crowns," highlighted just how crucial they can be.
The Power of Repurchases: More Than Just Returning Cash
For years, investors have flocked to "dividend aristocrats" – companies with a long history of consistently increasing their dividends – for their defensive qualities. Think of ETFs like the Schwab U.S. Dividend Equity ETF or the ProShares S&P 500 Dividend Aristocrats ETF. These are solid choices, no doubt.
However, companies are increasingly favoring share buybacks as a way to return profits to shareholders. In fact, according to S&P Global, S&P 500 companies spent a whopping $942 billion on buybacks last year, compared to $630 billion on dividends. This isn't just a trend; it's a significant shift with important implications for investors.
Why Do Companies Love Buybacks? (And Why Should You?)
There are a few compelling reasons why companies opt for buybacks:
- Tax Efficiency for Investors: This is a big one! Unless your shares are tucked away in a 401(k), you'll owe taxes on dividend income every year. Buybacks, on the other hand, boost the share price. You only incur a tax event (in the form of capital gains) when you decide to sell your shares. This deferral of taxes can be a powerful advantage.
- A Signal of Confidence: When a company's management allocates cash to repurchasing its own shares, it often signals they believe the stock is undervalued. It's a vote of confidence in the company's future prospects. Conversely, if shares are deemed fairly or overvalued, management is more likely to reinvest cash into the business or issue dividends.
- Outperformance in Tough Times: This is where the defensive aspect really shines. Wolfe Research recently screened for companies with a consistent history of net share buybacks (a minimum of 10 consecutive years). Their finding? This group of stocks has generally outperformed heading into and throughout recessions. It makes sense – a company confident enough to buy back its own shares during a slowdown is likely financially sound and resilient.
The Elite Club: Dividend Aristocrats with Buyback Crowns
The Barron's article highlighted a fascinating group: companies that are both Dividend Aristocrats and consistent buyback performers. These are the true defensive powerhouses, offering the best of both worlds.
Here are 10 companies that Wolfe Research identified as fitting this elite criteria:
- Lowe's (LOW)
- Genuine Parts (GPC)
- Colgate-Palmolive (CL)
- Walmart (WMT)
- Aflac (AFL)
- Cardinal Health (CNH)
- AO Smith (AOS)
- W.W. Grainger (GWW)
- Illinois Tool Works (ITW)
- Automatic Data Processing (ADP)
These companies demonstrate a commitment to returning value to shareholders through multiple avenues, making them particularly attractive in the current economic climate with a slowing economy and lingering trade problems.
Don't Overlook the Buyback Effect
While dividends remain a cornerstone of many defensive strategies, it's time to give share buybacks the attention they deserve. They offer tax advantages, signal management confidence, and have a track record of outperforming during economic downturns. By focusing on companies that are strong in both dividends and buybacks, you can truly fortify your portfolio for whatever the market throws your way.
Do you consider buybacks when evaluating a stock? What are your thoughts on this "twin" approach to returning shareholder value? Share your insights in the comments below!
