3 Companies Buying Back Stock Before a Rally

June 03, 2024 at 07:25 AM EDT

Adobe logo on signpost at Adobe Inc headquarters

Who is better to judge the actual intrinsic value of a stock than the insiders themselves? When the word insider is used here, it relates specifically to management in charge of a business’s financials and capital planning. Investors tend to focus on two main ways their stock holdings give them a return on investment: appreciation and dividends.

However, for reasons that will soon become clear, there may be better ways for management to reward their shareholders. Instead, stock buybacks send a more profound message to the markets and shareholders in a more tax-efficient way.

Because management typically buys back a stock when it believes prices are low relative to an actual value, investors could benefit from following the companies whose management teams believe stocks are cheap. On today’s list, it is Adobe Inc. (NASDAQ: ADBE), AutoNation Inc. (NYSE: AN), and PPG Industries Inc. (NYSE: PPG) that announced aggressive repurchase programs.

Share Buybacks: It’s Basically Free Money

While dividend stocks could be enticing to virtually any investor, after all, who doesn’t like to get a paycheck every quarter, there is a better – more hidden – way to get paid as a shareholder. Before all the benefits are discussed, here’s why dividends aren’t that great.

Because companies pay dividends through free cash flow (operating cash flow minus capital expenditures), tax expenses are applied to these cash flows before they are paid out as dividends. When investors receive these dividends, they must also pay income tax on these funds. Why go through double taxation?

Generally, there’s no need for that, so stock buybacks are a much better way to get rewarded. Using taxed free cash flow to buy back stock keeps money within the business, avoiding double taxation. Moreover, taking shares off the market increases the ownership rate for all existing shareholders.

If someone owns 2 shares out of 10, that investor owns 20% of a company. When management buys back two shares, the same investor owns 25% of the company, ideally growing.

These three companies are not only increasing, but they are also cheap enough for insiders to start buying.

1. Adobe's Stock Fall Makes it Irresistible

After trading down to 70% of their 52-week high, shares of Adobe became a stock to watch, especially for those who know the business inside and out. Adobe’s financials show the company gets to keep 88% of each dollar sold, potentially opening a path for investors to have a profit machine.

Using these high margins, Adobe’s management generates a return on invested capital (ROIC) rate of up to 23%. That being said, investors should remember that annual stock price action tends to match the long-run ROIC rate, satisfying the appreciation side of the equation.

However, what management decides to do with the rest of the money matters just as much. Last month, Adobe announced a $25 billion stock buyback program, which could take out as much as 10.8% of the stock's net shares outstanding.

Analysts at Piper Sandler agree that Adobe's stocks are on the cheap end. They justified a $700 share price target for the stock, daring it to rally by as much as 57.4% from where it sits today.

2. AutoNation is Sitting on Golden Consumer Trends

After contracting for over four months, the U.S. consumer sentiment index recently had its first expansionary reading, which is suitable for AutoNation for all the right reasons.

Because interest rates could remain high for the rest of 2024, consumers could shy away from financing a new car today. If new car inventories could be set to sit under the sun for a while, consumers are left with only one other choice, and that’s in used vehicles.

Knowing that these trends could present a reasonable opportunity for AutoNation to step up and serve rising demand, management announced a $1 billion buyback program, looking to take out 14.9% of the market's shares. Wall Street agrees with management here.

Those at Bank of America still think AutoNation stock could reach $215 a share, and to prove these predictions right, the stock would need to rally by as much as 26.2% from today’s trading price.

3. PPG Management is Painting a New Shade of Upside

A $2.5 billion buyback announcement, or 8.1% of total shares, could raise some eyebrows for PPG shareholders. This could be the case, particularly for a paint and coating stock, though it all makes sense when investors study the real estate sector.

There are 32% higher home prices versus pre-pandemic periods, 7.3% mortgages on average, and most U.S. outstanding mortgages with a 3.25% average interest rate. These are some of the factors creating a stalemate in the housing market, calling on construction stocks to solve this problem by building new inventory and normalizing this situation.

Based on today's environment, analysts at BMO Capital Markets think that PPG stock could hit $165 a share, representing a 25.5% upside from its current level.

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3 Companies Buying Back Stock Before a Rally

Share Buybacks: It’s Basically Free Money

1. Adobe's Stock Fall Makes it Irresistible

2. AutoNation is Sitting on Golden Consumer Trends

3. PPG Management is Painting a New Shade of Upside

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