When it comes to investing, many moves allow you to play offense or defense. But rarely can you play both angles. 

Yet share buybacks hold that unique role. In the current bull market, companies that have been buying back stock have outperformed the pack, as the PowerShares Buyback Achievers ETF (NYSE: PKW) is up around 150% over the past five years, 50 points ahead of the S&P 500 Index.  

Yet if the market heads south, buyback plans still have great value. They can be seen as havens of value because the companies conducting them usually have very strong balance sheets. And even if they do slump in value when the market sinks, the buyback plans are able to absorb even more stock. That can have an outsized impact on per-share profits. 

In fact, the role that buybacks are playing in EPS growth is more significant than you realize: According to a J.P. Morgan study, a significant portion of EPS growth among S&P companies is attributable to buybacks. 

I’ve been tracking the buyback activity for the second quarter, and compiled a short list of companies that have just announced plans to buy back at least 5% of shares outstanding. (These are large-cap and mid-cap stocks. I’ll perform a similar view of small-cap stocks later this month, once these firms have also weighed in with second-quarter results.)

To be sure, the best-timed buyback plans come when shares are far from their 52-week high. It’s a vote of confidence for a flagging stock — and not merely a gesture that says, “We have no idea what to do with our cash flow.” 

Buyback announcements can help a sinking stock reverse course. For instance, back in June, I noted that Bed, Bath & Beyond (Nasdaq: BBBY) had just delivered a tepid quarterly report but had considerable free cash flow. A few weeks later, the retailer announced a large share buyback plan, which has helped this stock to reverse course.



To be sure, not all buyback actions will have looked like a wise move in hindsight. Satellite radio provider Sirius XM (Nasdaq: SIRI) is taking on debt to fuel a huge buyback, though, as I noted a few weeks ago, the long-term challenges in the streaming radio industry suggest that Sirius should be bolstering its balance sheet, not weakening it. 

Of course, the best buyback plans are the ones that can reduce the number of shares outstanding in a meaningful way. 

Video- and audio-conferencing equipment provider Polycom (Nasdaq: PLCM) began seeing sales headwinds at the end of 2011, at which time shares outstanding stood at 181 million. A series of buybacks since then has shrunk the share count to a recent 143 million, and that figure could move below 130 million once a newly announced $200 million buyback plan is completed. If Polycom’s business begins to grow again in coming years, then EPS will really benefit, as the share count will have fallen by nearly a third. 

The Total Yield Play

Perhaps the most impressive shareholder rewards programs comes from energy firm Marathon Petroleum (NYSE: MPC) which had already been so active in terms of dividends and buybacks that it had returned roughly $3.1 billion in cash to shareholders in the 12 months ended June 30 (good for a 13.5% Total Yield). 

This is a company with a strong history of free cash flow generation, and management anticipates more of the same in coming years. That’s why Marathon has just boosted its dividend 19% (to $2 a share) while adding another $2 billion to its share buyback program. 

Marathon’s shares outstanding had already fallen from 358 million at the end of 2011 to a recent 289 million, and the new buyback plan could push the share count below 270 million. The quickly falling share count partially explains why EPS is expected to rise nearly 10% this year (even as sales pull back a bit) and a more impressive 28% in 2015 (to around $9.50 a share). 

Lastly, take note of lending firm CIT Group’s (NYSE: CIT) buyback plans, even as it completes its $3.4 billion acquisition of OneWest Bank. After the financial crisis of 2008, CIT needed to focus on its damaged balance sheet, but the massive buyback and acquisition signal that growth is now back on the menu. CIT is focused on small and medium businesses, and if the U.S. economic recovery takes root, then CIT’s lending activities should steadily strengthen. 

There is a lot to like about CIT’s acquisition as well: Management thinks it will provide a 20% boost to EPS by 2016, thanks to cross-selling and synergies. Analysts at BTIG project EPS to grow from $3.68 a share this year to $4.87 a share by 2016. Shares trade for around 10 times that forward estimate, and are currently valued just above tangible book value. 

Risks to Consider: Buyback plans always look good if stock rose higher after they are completed. But big buybacks plans right before a big market pullback can lead to concerns that such a move was ill-timed.   

Action to Take –> We can’t really time the markets — and neither can companies with their buyback plans. But these bold moves are likely to pay off for shareholders, regardless of the market’s direction.

P.S. — No strategy can protect investors from all market turmoil, but this one comes close. After months of research, my colleague Nathan Slaughter has proved that the Total Yield strategy can help shield investors from even the worst downturns. Not only has the strategy returned an average of 15% per year since 1982, but it’s outperformed the S&P during the dot-com bubble and the 2008 financial collapse too. To learn more about the Total Yield strategy, follow this link.