Investors Eye Major Stock Buybacks Amid Market Fluctuations
During quarterly earnings reports, many investors prioritize earnings per share (EPS) figures. However, there are other important metrics to consider. Recently, several companies have announced significant share buyback programs, offering investors a new opportunity for returns.
Investors typically profit from stocks in three ways: capital gains from selling high after purchasing low, dividend income, and a more tax-efficient method through stock buybacks. The last option is gaining attention as a favorable strategy.
As companies unveil their buyback plans, three notable firms stand out. In the energy sector, Marathon Petroleum Co. (NYSE: MPC) is leveraging low oil prices. Meanwhile, Bank of America Co. (NYSE: BAC) is capitalizing on bond holdings in the financial sector. Lastly, Altria Group Inc. (NYSE: MO) is becoming increasingly appealing in the consumer staples area.
Understanding the Benefits of Stock Buybacks Over Dividends
Consider a company with 10 shares, where an investor owns one, giving them a 10% stake. After management buys back two shares, only eight remain. The same investor’s ownership rate has now increased to 12.5%, all without any additional investment.
This increase in ownership is significant because it enhances per-share value due to reduced supply. Furthermore, stock buybacks provide better tax advantages than dividends. Since dividends are double-taxed—first at the corporate level and then as personal income—buybacks offer a favorable alternative for growing investor profits.
Marathon Petroleum: A Beneficial Buyback Strategy
The recent cut in interest rates by the Federal Reserve marks the most substantial move since the 2008 financial crisis, potentially leading to increased oil demand. Notably, Warren Buffett has acquired a substantial stake—29%—in Occidental Petroleum Co. (NYSE: OXY).
Marathon Petroleum is not backing down either. The company has approved a stock buyback program totaling up to $5 billion this quarter, equivalent to approximately 8.8% of its market capitalization. Analysts suggest Marathon’s stock has a consensus target price of $196.10 per share, signifying a potential upside of 13.2% from current levels.
Bank of America Poised for Growth Amid Bond Price Increases
Given the recent economic shifts, Bank of America’s management is aware of the opportunities ahead, having approved a stock buyback program of up to $25 billion. This amounts to nearly 8% of the bank’s market capitalization.
As interest rates decline, bond prices generally rise. Bank of America holds about $368.1 billion in treasury bonds, which could enhance its valuation significantly as these bonds appreciate. Oppenheimer analysts have raised the stock’s price target to $49 per share, indicating a 22.8% upside potential from its current price.
Altria’s Stock Buyback and Analysts’ Optimistic Outlook
Altria has also joined the buyback movement, approving a program of up to $1 billion. Wall Street analysts have reacted positively, setting a price target of $57 per share for Altria, suggesting a potential upside of 14.2% based on current trading levels.
Additionally, institutional investor Legal & General Group increased its holdings in Altria by 1.6% as of August 2024. Although this increase might seem modest, it now adds up to approximately $562.8 million, reflecting nearly 1% ownership in the company.
Notably, Altria’s stock is currently valued at a P/E ratio of 10.5x, which is a substantial 50% discount compared to the consumer staples sector’s average P/E of 20.5x. This valuation could strengthen the rationale behind management’s buyback decisions and investors’ assessments.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
