Why owning blue chips makes so much sense in a slow-growth environment: they have the cash and they are willing to spend it to keep shareholders happy—and that’s just one of the reasons.
Take Caterpillar Inc. (CAT), for example. This company is experiencing slow business conditions, because the mining industry is in its own recession.
The company can’t manufacture sales, but it can keep buying back its own shares. Management allocated $1.7 billion for share repurchases in this quarter alone. Last year, the company spent a total of $2.0 billion buying its own shares.
Caterpillar’s recent financial results surprised Wall Street. Even though sales were down comparatively, 2013 fourth-quarter revenues beat consensus by $1.0 billion and consensus earnings by $0.26 per share.
Big corporations have the cash, and while capital expenditures on plant, equipment, and employees are restrained, shareholders are the beneficiaries of such strong balance sheets.
United Technologies Corporation (UTX) reported fourth-quarter revenues below Wall Street consensus, but earnings were better than expected. The company plans to buy back $1.0 billion of its own shares this year after spending $1.2 billion in 2013.
Share repurchases help shareholders and corporate executives on a short-term basis, but if there is a drawback to them, it’s the opportunity cost of new business investment; excess cash could be invested in new research and development, expansion, acquisition, and innovation. A company that chooses to buy back its own shares is one that’s seemingly content with the status quo.
This coming Thursday, 3M Company (MMM) announces its 2013 fourth-quarter financial results. Around this time last year, the company authorized share repurchases of up to $7.5 billion. In the first nine months of last year, it spent $3.538 billion buying back its own stock, up from $1.49 billion in the first nine months of 2012.
Even though 3M authorized a $7.0-billion share repurchase program from 2007 to 2009, it didn’t effect any share repurchases in 2009, which in hindsight, would have been a much more opportune pricing. It had plenty of cash on its books to do so.
So far this earnings season, balance sheets are, once again, holding up strong and more dividends and share repurchases are likely in the bottom half of the year.
eBay Inc. (EBAY) bought back $254 million of its own common shares in the fourth quarter of 2013. Earlier this month, the company authorized another $5.0-billion share repurchase program.
As is commonplace, corporations are keeping their outlooks subdued in order to make it easier to outperform Wall Street consensus.
While the market trades off earnings news, balance sheets shouldn’t be ignored. Dividend-paying blue chips are still the stocks to own.
The Stocks to Own Right Now… was last modified: January 29th, 2014 by Mitchell Clark, B.Comm.
Mitchell Clark is a senior editor at Lombardi Financial, specializing in large- and micro-cap stocks. He’s the editor of a variety of popular Lombardi Financial newsletters, including Micro-Cap Reporter, Income for Life, Biotech Breakthrough Stock Report, and 100% Letter. Mitchell has been with Lombardi Financial for 17 years. He won the Jack Madden Prize in economic history and is a long-time student of equity markets. Prior to joining Lombardi, Mitchell was a stockbroker for a large investment bank. In the... Read Full Bio »
Forecasts Aug. 30, 2015
Immediate term outlook:
The bear market rally in stocks that started in March 2009, extended because of unprecedented central bank money printing, is coming to an end. Gold bullion is up $1,000 an ounce since we first recommended it in 2002 and we are still bullish on the physical metal.
Short-to-medium term outlook:
World economies are entering their slowest growth period since 2009. The Chinese economy grew last year at its slowest pace in 24 years. Japan is in recession. The eurozone is in depression. With almost half the S&P 500 companies deriving revenue outside the U.S., slower world economic growth will negatively impact revenue and earnings growth of American companies. Domestically, America’s gross domestic product grew by only a meager 2.3% in the second quarter, which will negatively impact an already overpriced equity market.
Estimates Aug. 30, 2015
Trailing 12-month EPS for Dow Jones companies (Most Recent Quarter)