How to Benefit from Company Buybacks and Earnings

The first quarter wasn’t just a record one for earnings and sales growth. It was also a record quarter of stock buybacks.

More than $500 billion in stock buybacks have been authorized in 2021 so far, which represents the fastest pace for stock buybacks in 22 years, according to the Wall Street Journal. Interestingly, this “buyback bonanza” isn’t showing any signs of abating any time soon either. Stock buybacks are anticipated to increase by at least 35% year-over-year in 2021.

The technology sector is leading buybacks and makes up 31.6%, or $56.4 billion of all repurchases for the first quarter of 2021. Second is the financial sector with 20% of buybacks. Healthcare took third place with 11.4% of all buybacks in the first quarter.

The top three largest corporate buybacks so far in 2021 were Apple Inc. (AAPL) with $18.8 billion; Alphabet Inc. (GOOGL) with $11.4 billion; and Microsoft Corporation (MSFT) with $7 billion, according to Forbes.

This is important to note because cash-rich companies in the S&P 500 that are buying back their stock naturally outperform the overall S&P 500. In the case of GOOGL and MSFT, they’re up 38% and 17%, respectively, year-to-date. The S&P 500 gained 11% during the same time period, while AAPL is down 1%. So, only AAPL is lagging the S&P 500.

The reason why stock buybacks are so effective is that they reduce the number of shares outstanding—and that provides a solid foundation under these stocks. So, as we enter the bumpy summer months, stocks with aggressive buyback programs, as well as generous dividend payments, will be more resilient to the market’s swings.

Now, the record pace of stock buybacks is great news, as it demonstrates that Corporate America is taking advantage of ultralow interest rates to refinance its existing debt and add to its cash reserves. Since the average return on equity (ROE) at most S&P 500 companies is much higher than money market rates, the finance executives at these companies tend to use excess cash to repurchase outstanding stock to boost returns and underlying earnings per share.

In fact, the massive amount of stock buybacks in the first quarter is one of the reasons why most companies posted better-than-expected earnings. FactSet reported that 86% of S&P 500 companies exceeded analysts’ first-quarter earnings estimates, and first-quarter earnings grew at an average 51.9% pace, or the highest year-over-year earnings growth rate in more than a decade.

Given that the relentless pace of stock buybacks has continued in the second quarter, as well as easier year-over-year comparisons, analysts are expecting even more spectacular earnings growth in the second quarter than the first. FactSet currently estimates that second-quarter earnings will soar 61% year-over-year, and sales are forecast to grow 19.3%.

Now, let’s focus on Apple for a moment. Over the last five years, Apple has spent $319.2 billion on buybacks and during that time, the company’s stock has almost quintupled in value. In its most-recent earnings conference call, the company announced that its board of directors approved a $90 billion increase in its buyback program.

While AAPL may have the largest buyback program, I’m not interested in it as a dividend or growth stock. I think there are fundamentally superior opportunities out there.

Case in point: DICK’S Sporting Goods, Inc. (DKS), one of my Growth Investor Elite Dividend Payers stocks. It exemplifies strong fundamentals and a great buyback program. Here’s what I mean…

DICK’S Sporting Goods is a successful outdoor and sports goods retailer. Today, there are nearly 730 DICK’S Sporting Goods retail locations in the U.S. The company also operates Golf Galaxy and Field & Stream specialty stores, as well as an e-commerce platform. And in the past year, DICK’S Sporting Goods experienced record demand at its brick-and-mortar stores and through its online storefront.

During the first quarter, sales soared 119% year-over-year to $2.92 billion. DICK’S noted that the increase in sales was driven by a 115% jump in same store sales. Online sales rose 110% year-over-year in the first quarter. First-quarter earnings surged to $367.2 million, or $3.79 per share, up from an earnings loss in the first quarter of 2020.

The analyst community was expecting earnings of $1.12 per share on $2.18 billion in sales. So, DICK’S posted a whopping 238.4% earnings surprise and a 34% sales surprise. DICK’S announced that it will pay a quarterly dividend of $0.36 per share on June 25. So, all shareholders of record on June 11 will receive the dividend.

Company management commented, “We are in a great lane right now, and 2021 will be our boldest and most transformational year in the company’s history.” As a result, DICK’S upped its outlook for fiscal year 2021. Full-year sales are expected to be between $10.52 billion and $10.81 billion, up from $9.58 billion in 2020. Full-year earnings per share are forecast to be between $7.05 and $7.68, up from $5.72 per share in fiscal year 2020.

In terms of buybacks, the company estimated a minimum guidance of $200 million for buybacks in 2021. So far in 2021, it has  purchased $76.8 million in buybacks. Take a look at DICK’s year-to-date buyback chart:

As you can see, the company is recovering rapidly from the effects of the pandemic and is now increasing its buyback program. So, it’s no wonder that I made DICK’S my number-one Elite Dividend Payer for June. The truth of the matter is it offers a nice blend of growth and income, which is why it earns an AA-rating (an A-rating in my Portfolio Grader and an A-rating in my Dividend Grader).

Now, let’s compare DICK’S to Apple and see how they stack up in Dividend Grader. (DKS’ Report Card is on the left and AAPL’s is on the right.)

As you can see, DKS earns an A-rating for its Total Grade. AAPL, on the other hand, earns a B-rating. DKS also holds an A-rating for its Quantitative Grade, while AAPL has a lowly D-rating, indicating weak buying pressure. So, while AAPL is a buy right now, DKS’ is clearly the stronger buy.

It’s also significantly outperformed AAPL this year, up 63% year-to-date, while AAPL is about flat over the same time period.

This is just one of many fundamentally superior companies with robust buyback programs at Growth Investor. If you’re interested in my Top 3 Stocks list of Elite Dividend Payers, as well as full access to my Elite Dividend Payers Buy List, click here. This Buy List is also chock full of companies that reward shareholders with consistent and growing quarterly dividends.

P.S. There’s a great divide opening up in America and investing in my Growth Investor stocks will help get you on the right side of it. On one side is a new aristocracy that’s amassing more wealth more quickly than any other group in American history. For people like me, the one percent, life has never been better, more prosperous.

On the other side, the opposite is happening. Wealth is flowing out of the pockets of ordinary Americans at an unprecedented rate.

What’s happening is only going to gather in strength over the coming decades. It certainly won’t weaken.

Few Americans even know that any of this is going on. I’ve never seen anyone from my side of the chasm step forward to explain any of these things.

It’s why I put together this video. In it, I’ll lay out exactly what is happening, including several key steps every American should take right now.

It doesn’t matter if you have $500 in savings or $5 million. You can benefit from the information in this video.

It’s free to watch and by doing so I know you’ll be ahead of everyone else struggling to understand what is really going on.

The Editor hereby discloses that as of the date of this email, the Editor, directly or indirectly, owns the following securities that are the subject of the commentary, analysis, opinions, advice, or recommendations in, or which are otherwise mentioned in, the essay set forth below:

DICK’S Sporting Goods, Inc. (DKS)

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