Wall Street felt like the 1% tax on share repurchases would slow companies buying back stock. That didn’t happen, The Wall Street Journal argued in March. However, it did say that the proposed 4% tax on buybacks just might. This has led to the rise of companies buying back stocks.
“[D]espite the 1% levy, stock buybacks by companies in the S&P 500 are projected to top $1 trillion in 2023 for the first time in a calendar year, according to S&P Dow Jones Indices,” the WSJ stated.
Warren Buffett has defended share repurchases in his 2022 shareholder letter, stating, “When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue,” the newspaper reported Buffett’s comments.
Even if the 4% tax makes it into law — and it’s a long way from getting there — plenty of large-cap publicly-traded companies will continue to buy back their stock because it’s an efficient way to distribute excess earnings to shareholders without immediate tax implications.
With the 1% tax in place in January, companies announced $132 billion in share repurchase plans, the largest amount ever reported in the first month of the year.
Here are the three best stocks for buybacks. I selected the names from the Cambria Shareholder Yield ETF (BATS:SYLD).
Toll Brothers (TOL)
Toll Brothers (NYSE:TOL) has a shareholder yield of 5.12%, comprising a 1.1% dividend yield and a 4.1% buyback yield. While both are lower than the homebuilder’s five-year average, it remains the fourth-highest weighting in SYLD, indicating that it is very shareholder friendly.
It announced a 5% increase in its quarterly cash dividend in March. It now earns 84 cents on an annualized basis. In the first six months of 2023, it paid out $46.3 million, up a couple of million from a year earlier.
On May 17, 2022, Toll Brothers announced a new share repurchase plan for 20 million shares in open market transactions. In the first six months of 2023, the homebuilder bought back 1.63 million shares at an average cost of $57.20. That’s on top of 5.22 million purchased in the first six months of 2022. It’s one of those companies buying back stocks to pay attention to.
Over the past three fiscal years, Toll has repurchased $1.56 billion of its stock. As of Dec. 19, 2019, it had 138.7 million shares outstanding. As of May 30, it had 109.3 million outstanding, a 21% reduction in its share count over the past 41 months.
TOL shares are up 56.2% year-to-date.
Nucor (NYSE:NUE) has a shareholder yield of 6.79%, comprising a 1.2% dividend yield and a 5.5% buyback yield. Its buyback yield is 75 basis points higher than the steelmaker’s five-year average. It is the 11th-highest weighting in SYLD.
In May, the steelmaker announced a new share repurchase program to buy back up to $4 billion of the company’s stock. It replaced the previous $4 billion share repurchase plan. Under the old plan, which started in December 2021, Nucor bought back $3.79 billion of the $4 billion in just 15 months.
So, in the past three fiscal years, Nucor paid out $1.51 billion in dividends and $3.13 billion in share repurchases.
As of Feb. 21, it had 251.9 million shares outstanding. As of Feb. 21, it had 301.0 million outstanding, a 16% reduction in its share count over the past 36 months.
Nucor stock is up 27.5% YTD. It’s recovered nicely since hitting a low of $132.06 in late May. It’s one of my favorite free cash flow plays.
Aflac (NYSE:AFL) is a stock I write about sparingly. However, I do like their ads with the Aflac duck. My InvestorPlace colleague Josh Enomoto recommended AFL as a Dividend Aristocrat stock to buy and hold forever in May.
Josh pointed out that it’s increased dividends for 40 straight years. Its current annual rate of $1.68 yields a reasonable 2.3%. In Q1 2023, it paid out $248 million in dividends to shareholders and repurchased $700 million of its stock.
Over the past three fiscal years, it repurchased $6.24 billion of its stock. As of April 21, it had 604.2 million shares outstanding. As of Feb. 12, 2020, 722.5 million were outstanding, a reduction of 16%.
It has a shareholder yield of 8.18%, comprising a 2.3% dividend yield and a 5.9% buyback yield. Its buyback yield is 90 basis points higher than the insurance company’s five-year average. It is the 22nd-highest weighting in SYLD.
While its stock hasn’t done well in 2023 — it’s up less than 2% YTD — it’s done just fine over the past year, up nearly 30%. You’re not going to get rich owning Aflac stock. However, except for the March 2009 and March 2020 corrections, AFL is a very consistent stock. This makes it one of those companies buying back stocks to pay attention to.
On the date of publication, Will Ashworth did not have (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.