Share buybacks, when executed well, can be a powerful way for stocks to generate value for their investors.
Often, when a business buys its stock as part of a share repurchase program, it lowers the number of shares outstanding. While dilution through stock-based compensation or stock offerings can impede this, a steadily declining share count offers the potential for more-substantial returns.
If a company buys back 20% of its shares, its earnings per share (EPS) increase by 25%; if it lowers its count by half, EPS doubles.
Five companies riding the power of this increasing EPS are Apple (NASDAQ: AAPL), Kroger (NYSE: KR), O'Reilly Automotive (NASDAQ: ORLY), Murphy USA (NYSE: MUSA), and Lowe's Companies (NYSE: LOW).
Data by YCharts.
Along with these steadily declining share counts, here's what makes these five top stocks fantastic candidates for investors to buy and hold forever.
1. Apple
Apple has not only repurchased 20% of its shares over the last five years, but also dropped its count by 40% over the last 10. Fueled by this lower share total, Apple's EPS rose by 294% in the last decade, compared to its sales increase of 129% over the same time.
A few prognosticators seem to think Apple's fortress showed a few cracks as sales dropped 5% in the first quarter of 2023, but its high-margin services segment grew by 6%. That segment -- made up of advertising, AppleCare, cloud services, digital content, and payment services -- should continue to thrive as Apple's ecosystem becomes further integrated into its 2 billion users' lives.
Best yet, the company's 58% return on invested capital (ROIC) ranks as the ninth best in the S&P 500 index. Measuring profitability compared to debt and equity, high ROIC generators tend to outperform, making Apple's buyback track record look even more enticing.
2. Kroger
Kroger has postponed new buybacks, waiting for approval on its proposed $25 billion deal for fellow grocer Albertsons(NYSE: ACI). But its 31% decrease in shares since 2013 is still impressive. Already saddled with $11 billion in long-term debt compared to $2 billion in cash, management wants to build its cash balance before it becomes further indebted with the merger.
Whether the deal is approved or not, Kroger's history of returning cash to shareholders should keep it on savvy investors' radars. Besides its repurchases, the company has raised its dividend (now yielding 2.4%) for 19 consecutive years -- and only uses 23% of its earnings to fund these payouts.
Posting 7% same-store sales growth (minus fuel) and 13% adjusted EPS growth in the third quarter, Kroger saw digital sales and private-label brands lead the way, each increasing by 10%. The grocer will never be mistaken as a growth company, but its EPS has nearly tripled over the last decade, while its dividend jumped 238%.
Kroger is down 30% from its 52-week highs, and now trades with a low 5.8 ratio of enterprise value to EBITDA (earnings before interest, taxes, depreciation, and amortization).
Data by YCharts.
This low valuation and the company's incredible cash returns to shareholders mean investors could be getting a discount on this steady stock as the market weighs the uncertainty surrounding its mega-merger.
3. O'Reilly Automotive
After lowering its share count by 44% across the last decade, car parts distributor O'Reilly and its 5,900 stores could be the most aggressive repurchaser on this list. The company has bypassed a dividend in favor of returning all of its cash to shareholders with buybacks and has grown its EPS by a stunning 574% since 2013.
With 59% of its sales from do-it-yourself (DIY) purchasers, the company boomed during the lockdown as its customers kept busy maintaining their cars at home. The remaining 41% of its sales comes from its professional unit (delivering parts to mechanics), which restarted its double-digit growth once the pandemic waned.
O'Reilly aims to add 180 to 190 stores in 2023 as it expands geographically, with new distribution centers in Puerto Rico and Mexico.
These incredible cash returns to shareholders are combined with the eighth-highest ROIC in the S&P 500 index, so look for O'Reilly to continue outpacing the market.
4. Murphy USA
Following its spinoff from Murphy Oil in 2013, convenience store operator Murphy USA has eliminated 53% of its total shares outstanding. It is recognizable thanks to its 1,150 kiosk stores located near Walmart locations across the U.S., but it is turning its attention to growing its own independent shops.
It now has over 500 stand-alone, larger-format stores running under the Murphy Express and QuickChek brands, and it is expanding its food and beverage operations.
The company initiated a dividend in late 2020 and now pays a yield of 0.5%, which only uses a minuscule 5% of its net income. This low payout ratio leaves abundant room for future dividend increases while simultaneously allowing for continued share repurchases.
Murphy USA trades at an EV-to-EBITDA ratio of just 6.4 -- despite posting a total return of 600% since its debut on the stock market -- and is a premiere example of investing in simplicity.
5. Lowe's
The last in our group, Lowe's, has removed 44% of its share count since 2013 -- boosting EPS by almost 500% over the same time. Making this feat even more impressive is Lowe's 59 years of consecutive increases for its dividend, which now yields 1.9%.
Focusing on its total home strategy, the company emphasizes its professional sales, installation offerings, and omnichannel experience at each store. DIY and pro sales account for a 50-50 split in the $1 trillion overall home improvement market, but the pro side only accounts for 26% of Lowe's sales.
This difference leaves a long runway for growth, especially with its new pro rewards members spending three times more than their nonmember peers.
Lowe's trades at 19 times free cash flow. Its strong cash returns to shareholders and ROIC near 40% make it another excellent compounder to buy and hold forever.
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Josh Kohn-Lindquist has positions in Apple, Lowe's Companies, and Murphy Usa. The Motley Fool has positions in and recommends Apple and Walmart. The Motley Fool recommends Lowe's Companies and Murphy Oil and recommends the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.
