Corporate Cash is Flowing Back to Investors

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Recently, corporate America has been faced with a problem. The basic rate of interest is so low that companies don't have many options as to where to put their profits and excess cash.

Currently, businesses are not reinvesting the cash into new growth projects or acquisitions as feverishly as they have in the past.  Nor are they paying out dividend distributions, because this does not improve a company's long term outlook.  Instead firms have turned to share repurchase programs, giving rise to the term 'the great shrinkage'.

Here's a list of the shares in issue for each of the DOW 30 components from 2010 to 2013.  Johnson & Johnson, Verizon Communications, DuPont, Boeing, Caterpillar and Alcoa, have all seen a slight uptick in the number of shares in issue. And that's due to options exercise and employee stock rewards.

You'll also notice Bank of America, which has incurred a disproportionate rise the number of its shares.  From what's left, we can see the total number of shares in issue across the 24 remaining DOW components, has fallen 7.05%. Including all companies apart from Bank of America, the number of shares in the index has fallen 6.13%.

Falling number of shares

Company

Q1 2013 shares in issue (billions)

2012

2011

2010

Change

The Travelers Companies, Inc. (NYSE: TRV)

0.377

0.386

0.415

0.476

-20.80%

Hewlett-Packard Company

1.94

1.97

2.09

2.32

-16.38%

International Business Machines Corp. (NYSE: IBM)

1.11

1.14

1.2

1.27

-12.60%

Intel Corporation (NASDAQ: INTC)

4.95

5

5.26

5.56

-10.97%

The Home Depot, Inc.

1.47

1.5

1.56

1.65

-10.91%

Pfizer Inc.

7.19

7.44

7.82

8.04

-10.57%

Wal-Mart Stores Inc.

3.3

3.37

3.46

3.66

-9.84%

Cisco Systems, Inc.

5.3

5.4

5.56

5.85

-9.40%

Unitedhealth Group, Inc.

1.02

1.03

1.07

1.12

-8.93%

Exxon Mobil Corporation

4.49

4.63

4.87

4.89

-8.18%

Walt Disney Co.

1.8

1.82

1.91

1.95

-7.69%

American Express Company

1.11

1.14

1.18

1.2

-7.50%

AT&T, Inc.

5.5

5.8

5.9

5.91

-6.94%

McDonald's Corp.

1

1.01

1.03

1.07

-6.54%

Procter & Gamble Co.

2.74

2.75

2.8

2.9

-5.52%

Microsoft Corporation

8.36

8.4

8.49

8.81

-5.11%

JPMorgan Chase & Co.

3.82

3.81

3.9

3.96

-3.54%

The Coca-Cola Company

4.46

4.5

4.57

4.62

-3.46%

3M Co.

0.691

0.693

0.708

0.713

-3.09%

General Electric Company

10.37

10.52

10.59

10.66

-2.72%

Merck & Co. Inc.

3.02

3.04

3.07

3.1

-2.58%

Chevron Corporation

1.96

1.97

2

2.01

-2.49%

United Technologies Corp.

0.901

0.895

0.892

0.907

-0.66%

Johnson & Johnson

2.75

2.75

2.75

2.75

0.00%

Verizon Communications Inc.

2.87

2.85

2.83

2.83

1.41%

Du Pont

0.942

0.942

0.941

0.921

2.28%

Boeing Co.

0.766

0.761

0.753

0.744

2.96%

Caterpillar Inc.

0.671

0.6696

0.666

0.65

3.23%

Alcoa, Inc.

1.07

1.07

1.06

1.02

4.90%

Bank of America Corporation

11.15

10.84

10.25

9.8

13.78%

Total

85.948

87.2566

89.345

91.561

-6.13%

Which company has produced the best returns?

It's all very well and good knowing which companies have brought back the largest amounts of shares, but it is more important to know how this has affected investor returns.

It is often the case that the biggest buyback programs do not offer investors much due to the huge number of shares in issue for the company involved. For example, Lorillard is one of the smaller companies in the S&P 500 and its buyback program amounts to about $500 million a year.

However, over the past three-years the company has reduced its number of basic shares in issue by 37%. In comparison, Johnson & Johnson bought back $12.9 billion of stock during 2012 and did not make a dent in the total number of shares it had in issue.

So these are the three companies from the chart above that have achieved the best returns for investors.

Company

Basic shares in issue 2010

Basic shares in issue Q1 2013 

Net income Q1 2013

Q1 2013 EPS based on 2010 shares in issue

Q1 2013 EPS based on current shares in issue

Change

Period average stock price

Shares repurchased

Total returned to investors

The Travelers Companies

 

476

377

$896

$1.88

$2.38

26.3%

$60

100

$5,940

Figures in millions except for per share figures

Over the past three years, Travelers has spent $5.94 billion repurchasing stock, reducing the number of shares by 26.3%.  Which happens to be the amount the company would have driven EPS by if its income had not grown.

Company

Basic shares in issue 2010 

Basic shares in issue Q1 2013

Net income Q1 2013

Q1 2013 EPS based on 2010 shares in issue

Q1 2013 EPS based on current shares in issue

Change

Period average stock price

Shares repurchased

Total returned to investors

International Business Machines

 

1.27

1.11

$3.3

$2.6

$2.97

14.4%

$160

0.160

$25.6

Figures in billions except for per share figures

IBM is a favorite company for investors as it returns nearly all of its net income to shareholders through both dividends and buybacks. The company has repurchased 160 million shares since 2010 (at a total cost of $25.6 billion), improving EPS by 14.4%. That works out to be around 6% a year, without the impact of rising income.

Effectively, if IBM traded on the same earnings multiple during the past three years the company's shares would have risen 6% a year.

Company

Basic shares in issue 2010

Basic shares in issue Q1 2013

Net income Q1 2013

Q1 2013 EPS based on 2010 shares in issue

Q1 2013 EPS based on current shares in issue

Change

Period average stock price

Shares repurchased

Total returned to investors

Intel

 

5.56

4.95

$2.45

$0.40

$0.45

12.3%

$21.7

0.610

$13.2

 Figures in billions except for per share figures

Lastly, Intel has bought back 610 million shares since 2010 at a total cost of $13.2 billion. This has driven up EPS by 12.3%, excluding the effect of variations in the company's income. If the company traded continuously on the same earnings multiple, then the stock would have risen about 3%-4% a year excluding the company's current 4% dividend yield.

Conclusion

Corporate cash is flowing back to shareholders through equity buybacks and the three companies above are achieving the best returns. All three companies have managed to reinvest their cash and drive EPS, which should power stock prices. Although these are historic numbers, good fiscal management in the past usually indicates good fiscal management in the future.

So overall, investors who are looking for good returns and a rising share price boosted by buybacks should look to Intel, IBM and Travelers as the best choices.

When it comes to dominating markets, it doesn't get much better than Intel's position in the PC microprocessor arena. However, that market is maturing, and Intel finds itself in a precarious situation longer term if it doesn't find new avenues for growth. In this premium research report on Intel, a Motley Fool analyst runs through all of the key topics investors should understand about the chip giant. Click here now to learn more.


Fool contributor Rupert Hargreaves has no position in any stocks mentioned. The Motley Fool recommends Intel. The Motley Fool owns shares of Intel and International Business Machines.. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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