The Truth About Stock Buybacks

There’s been a lot of disagreement on Capitol Hill recently about stock buyback programs. Politicians on both sides of the aisle are claiming that stock buyback programs are “manipulative,” and that companies shouldn’t be able to buy back their stock. Let me be clear: They are wrong!

Anyone who has attended business school and taken Finance 101 knows that companies have the right to finance their business with debt or equity. And when price-to-earnings ratios and interest rates are low, it’s simply good business for a company to buy back its stock.

That’s the environment that we’ve been in for a while now. In fact, the low interest rate environment created a stock buyback frenzy in 2018. Corporations issued cheap corporate debt to fund aggressive share repurchase programs. While the final buyback number for 2018 hasn’t been released yet, more than $800 billion in stock buybacks were announced. So, I anticipate that there was between $800 billion and $1 trillion in stock buybacks in 2018.

Folks, this is great news for investors.

There are a few reasons why stock buybacks are a huge plus for investors. First, it’s a positive sign that the company considers its shares a good bargain and that management is confident in the business going forward. Second, reducing the pool of outstanding stock not only makes the shares more valuable, it also reduces share price fluctuations. And third, stock buybacks increase earnings per share, which helps a company beat analysts’ estimates when it announces quarterly results.

Delek US Holdings, Inc. (DK) is a great example of this. The company has announced several buyback plans in 2018, including a whopping $100 million in share buybacks in the third quarter. So it was not surprising that we saw DK post a strong fourth quarter on Wednesday morning.

Shares opened nicely higher on Wednesday after the company topped the consensus earnings and sales estimates for its fourth quarter. The company achieved earnings of $121.6 million, or $1.48 per share. Adjusted earnings per share surged 174.1% year-over-year to $1.59 per share, which crushed estimates for $1.25 per share by 27.2%.

Fourth-quarter revenue rose 5.4% year-over-year to $2.41 billion. The consensus estimate called for revenue of $2.38 billion, so DK posted a slight sales surprise.

For fiscal year 2018, Delek US Holdings announced earnings of $345.6 million, or $4.02 per share on $10.17 billion in revenue. That represents 19.7% annual earnings growth and 40% annual revenue growth. Adjusted earnings per share soared 261% year-over-year to $4.80, up from $1.33 per share in 2017.

I should also add that Delek US Holdings will pay a quarterly dividend of $0.27 per share on March 19. That represents a 3.8% increase over the previously paid dividend. All shareholders of record on March 5 will receive the dividend.

Company management also announced that it expects to repurchase another $50 million in shares during the first quarter of 2019. This is great news, and it should continue to benefit the stock. DK is a strong company and holds an “A” rating on my Dividend Grader and a “B” rating on my Portfolio Grader. These remain great tools to use as earnings continue to roll out and you want to see how the stocks stack up.

Sincerely,

Louis Navellier

Louis Navellier

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