When you think of income stocks, dividends usually spring to mind. However, there is another way to return money to shareholders and that is through share buybacks. There has been a buyback boom in the US over the last two decades, with share repurchases eclipsing dividends as the favoured way to return cash to shareholders.
For example, roughly two thirds of the biggest US companies have repurchased shares in the last 12 months, according to Morningstar.
Although the FTSE 100 traditionally pays a better dividend yield than the US, at 3.16% vs. 1.16% for the S&P 500, share buybacks have soared in the UK, especially since Covid19. The reasons for this include more flexibility, with dividend expectations for payouts every quarter, regardless of the fundamental backdrop. Also dividends can be taxed, and share buybacks are a way to help increase the price of the share price.
The UK has recently become the share buyback capital of the developed world, with more companies looking at buying back shares than any other developed market in the last 2 years.
Thus, when you’re looking for shareholder returns, think about buybacks and not only dividends. Below we look at 3 stocks that offer strong shareholder returns and could be a good investment.
1. BP
The oil major recently reported Q3 earnings and announced that it intended to buyback another $750 mn of shares, this comes after another $750mn share buyback in Q2. BO also offers a dividend of $0.0832, which is the same as Q2, but significantly higher than a year ago. This is a double whammy of return for the shareholder and combined with an attractive 12-month forward P/E ratio of 13 times earnings, this could be the stock to watch as we progress through Q4.
Chart 1: BP share price
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Source: Bloomberg. Past performance is not a reliable indicator of future results.
2. The American Electric Power Company
This stock is a top dividend payer in the US, which is fairly typical of utilities companies. The stock is in demand and has risen 25% over the past 12 months, and it has a dividend yield akin to a UK company at more than 3%. The stock is also trading with a 12-month forward P/E ratio of 19 times future earnings, which is much lower than some of the AI stocks in the US.
Interestingly, electricity companies will also benefit from the AI future, due to the huge amount of power needed to fuel AI GPUs. Thus, American Electric Power Company is a good way to get exposure to a decent dividend yield alongside a good value way to benefit from the AI trade.
Chart 2: The American Electric Power Company share price
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Source: Bloomberg. Past performance is not a reliable indicator of future results.
3. Best Buy
This American stalwart is also a reliable dividend payer, and the stock performed strongly last month. The consumer electrical appliance retailer has a dividend yield of more than 4%. Although it hasn’t offered a share buyback programme in recent earnings reports, this could be coming down the line. The company has a P/E ratio of 12 times future earnings, which is good value for a US stock. The company reported nearly $10bn in revenue last quarter, which is higher than the $9.4bn reported in Q2, suggesting that this company is resilient to any economic weakness in the US, and to US tariffs.
Chart 3: Best Buy share price
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Source: Bloomberg. Past performance is not a reliable indicator of future results.
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