|TheStreet.com, Spring, 2013. This article was written with Oliver Pursche, the Co-Portfolio Manager of the GMG Defensive Beta Fund. It was part of a series of articles developed under an agreement with thestreet.com to work with a variety of contributors and assist them in delivering actionable investment ideas each week.|
I’m susceptible to conspiracy theories. Not the “we never put a man on the moon” type but different ones.
For instance, I believe conventional Wall Street has an interest in making investing more complicated than it really is. Why else would you come up with product names such as FTSE RAFI US 1500 Small-Mid Portfolio (PRFZ) unless you wanted to scare people into thinking they need advice in deciding whether or not to buy it.
Let’s not forget that, at the end of the day, successful investing relies upon some pretty basic economic theories like supply and demand. Shrinking supply and increasing demand drive prices up.
This fundamental theory is the beginning of the analysis that gives me confidence in the stocks listed below. For these companies, as well as others, the supply of outstanding shares is shrinking, and the demand, as I see it is increasing.
First the supply.
Specifically, today’s low, low interest rates, which I believe will persist for the balance of the decade, make it feasible for companies to swap equity for very cheap debt. To whit, IBM (IBM) used the proceeds from a 2010 bond offering, which pays a 1% yield, to repurchase stock. Incidentally, at the time, IBM stock paid a 2% yield, indicating that if 100% of the proceeds were ultimately used to purchase shares, IBM was able to lower its cost by 100 basis points on that layer of its capital — a neat trick.
This is not an isolated trend. In 2012, U.S. companies spent over $400 billion to buy back their own shares. In the first quarter of 2013, U.S. companies announced over $120 billion in new share buybacks.
Despite the size of the buybacks of the trend, I believe investors can access the benefits only through large-cap companies. Here’s why: Access to cheap credit is not evenly distributed. For many smaller companies, credit can still be tight.
Now for the demand. Large-cap companies are the most likely beneficiaries of the tailwind on equities in general. While investors pulled some $124.7 billion from equity funds in 2012 and poured $535.2 billion into fixed income funds, the trend has started to turn around.
More monies flowed into equities (mutual funds and ETFs) in the first quarter of 2013 than monies flowed into fixed income funds. Pervasive indexing, as well as the preponderance of large-cap-oriented fund products, suggests the Walmarts, Chevrons and Microsofts of the world will be the largest beneficiaries of this trend.
So here’s my list of eight companies that had share buybacks (and increased their dividends) within the last year, according to Bloomberg data. All of these companies are owned by the GMG Defensive Beta Fund (MPDAX) I co-manage, and most are held in separate accounts managed by our firm.
Exxon Mobil (XOM)
Johnson & Johnson (JNJ)
United Parcel Service (UPS)
CVS Caremark (CVS)
Home Depot (HD)