Outperform with these best stocks for share buybacks that shrank share count significantly in 2023
When done correctly, buybacks can be a great source of value for shareholders. Indeed, buybacks indicate that a company is in great financial shape and generating solid free cash flow. That’s why buying the best stocks for share buybacks can lead to significant outperformance.
Ideally, when companies with healthy growth do buybacks, their stock outperforms. First, the demand from repurchases provides a floor on the stock. Second, if the company isn’t issuing shares exceeding the buyback, the shares outstanding shrink over time. As a result, the buyback becomes accretive to EPS due to the reduced share count.
What’s more, buybacks can be valuable when a stock is undervalued. Buying back stock below intrinsic value is a good use of cash. The following best stocks for share buybacks have been generating lots of cash flow for buybacks. Last year, each reduced its share float by over 5%. Besides, each has an authorized repurchase program for more buybacks.
Marathon Petroleum (MPC)
Marathon Petroleum (NYSE:MPC) has been a top performer with an aggressive buyback strategy. Indeed, North American refiners have been a sweet spot supporting stock outperformance. Several conditions have created these positive industry dynamics.
First, due to regulatory pressures, refineries in the U.S. have been closing or converting to other uses. Due to constrained capacity, S&P Global expects a tight market for refined products such as jet fuel, gasoline and diesel. Thus, refiners will continue to enjoy tremendous margins.
In 2023, MPC generated $13.8 billion in cash flow from operations. Due to this robust cash generation, the company repurchased $11.6 billion in stock, reducing the share float by 18%. Furthermore, the refiner increased its dividend by 10%. These actions resulted in an impressive 31% total shareholder return.
In terms of the outlook for 2024, the refined product market will continue to remain constrained. This challenge has no quick fix as refineries close and convert to biofuel processors or distribution terminals.
Marathon Petroleum remains one of the best stocks for share buybacks due to its continuing efforts to return excess capital via share buybacks. The company has repurchased over 300 million shares or 45% of the share count, since May 2021. Repurchasing shares at the current 12 times earnings will drive the stock higher.
General Motors (GM)
General Motors (NYSE:GM) is one of the cheapest stocks on the S&P 500 and the company has been buying back stock aggressively.
Last year, General Motors had a tough ride due to an unprecedented labor union strike. The uncertainty around the strike prevented the company from aggressively pursuing its shareholder return program. Despite these challenges, the company completed a $7.67 billion buyback in 2023.
After reaching a tentative deal with the United Auto Workers union, the company immediately announced a shareholder return program. On Nov. 29, 2023, it announced an accelerated $10 billion buyback plan. These buyback efforts are likely to continue in 2024.
Operationally, the carmaker has had a great start in 2024. It has ramped up its electric vehicle production efforts with massive wins in some categories. For instance, Cadillac LYRIQ is setting monthly records and outselling other luxury import brands.
As of this writing, GM stock is a steal. It has a forward non-GAAP price-to-earnings ratio of 5 and a trailing EV/EBITDA multiple of 10. Any buybacks at these levels will be good capital allocation. Management has a knack for opportunistic repurchases, which drive the stock higher.
Builders FirstSource (BLDR)
Builders FirstSource (NYSE:BLDR) is the largest distributor of building products in the U.S. Its major customers include single-family and multi-family homebuilders and remodelers.
So, why is this building supplier one of the best stocks for share buybacks? The company has been an uber cannibal in recent years, aggressively repurchasing shares. In 2023, it repurchased $1.8 billion in stock, shrinking its share count by 12.2%. Moreover, on February 21, its board increased the stock buyback plan to $1 billion.
With the housing market improving, Builders FirstSource will do well. On the macro front, rate volatility has declined recently, which bodes well for the housing market. The company’s largest revenue source is value-added and specialty products. These products have higher gross margins and allow the company to generate robust free cash flow.
Additionally, the company has achieved considerable scale through acquisitions. Since 2015, it has made two large acquisitions—ProBuild in 2015 and BMC in 2021—and 23 smaller tuck-in acquisitions. As a result, it has built a robust distribution platform that boasts cost advantages over competitors.
Due to the massive housing shortage in the U.S., homebuilding will remain strong. Homebuilders will continue to source lumber, flooring, roof trusses, wall panels and other building products from Builders FirstSource.
On the date of publication, Charles Munyi did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.