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JohnCLeven (75.58)

A few high return companies that aggressively buy back shares.

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June 11, 2013 – Comments (17)

A few high return companies, that aggressively buy back shares.

I was looking for companies with: 1) 10 yr avg ROIC over 10%, 2) 5 yr annualized buyback rate over 3%, and 3) fwd PE under 17. 

For the 5 yr annualized BB rate, I took the most recent yr’s share count, and the share count from 5 years ago, and simply plugged them in this CAGR calculator: http://www.moneychimp.com/calculator/discount_rate_calculator.htm

For added context, I also threw in data on dividend yield, the sum of 5 yr bb rate % and current dividend yield, ev/ebit, p/fcf, and roic trend 

Share count, ROIC, fwd PE, div yield data all came from Morningstar, and ev/ebit and p/fcf info came from Gurufocus.

I found 28 companies that essentially fit these requirements. The 28 companies on this list aren’t necessarily stocks to go out and buy right this second, (though some are), it’s really just a watch list of sorts. Most of these companies are decent and worth following. 

Here are 28 intriguing, high return companies that aggressively buyback shares:

https://docs.google.com/spreadsheet/ccc?key=0AiCyYoc2ERYzdGpwRWEyTG11X0loYWlrM0ZHcDF4SkE&usp=sharing

p.s. the NMF means “no meaningful figure” and is showing in the ROIC column for companies with negative book value. 

The 28 companies on this list aren’t necessarily stocks to go out and buy right this second, (though some are), it’s really just a watch list of sorts. Many of these companies are of decent quality and worth following.

p.s.s. If you can think of any other companies that would make this list…please comment and let me know. 

p.s.s.s. I still don't know how to format these correctly. I don't know why some parts are bold. I have the tech skills of a 4 year old. 

Enjoy!

17 Comments – Post Your Own

#1) On June 12, 2013 at 12:48 AM, valuemoney (99.99) wrote:

You will retire rich. I think you got it now. Don't let that go to your head though.

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#2) On June 12, 2013 at 9:06 AM, ElCid16 (96.87) wrote:

Good stuff, again.

I like the (div + buyback) yield calc.  :)

I don't see TJX on the list - I think that one maybe just missed the cut.

Could you do a small favor?  Could you play with this screen a little bit?  Maybe do 2% buybacks and a 1% dividend rather than 3% buybacks and  no div criteria?  I think that might turn over another 3-5 really good picks that didn't quite meet your 3% buyback quota.

An alternative screen would be to replace the 3% buybacks with a 3% div.  Then it would turn up more companies like BKE.  :) 

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#3) On June 12, 2013 at 3:54 PM, JohnCLeven (75.58) wrote:

Elcid,

TJX meets the requirements of this list. (-4.39% annualized reduction in shares over the past 5 years, plus a 0.98% div yield. The sum is 5.37%, also fwd PE is under 17)

So thanks for pointing TJX out.

Here's your small favor: It started as a generic Morningstar screen for ROE>15%, 2007 share count > current share count. (425 companies passed) I then added a filter for a Morningstar rating of 3 stars or better. (100 or so passed, though this filter probably allowed some great companies to slip through)

I then calculated the 5 yr annualized % reduction in shares (and got rid of about 35 companies who had bb rates under 1%), and added the dividend yield, and a column with the sum of those two numbers. I did no other filtering for quality or valuation. I opted for a quick response over a thorough response lol. Anyway, I know you're more than capable of doing the other quality and valuation filtering.

These lists are only meant to be a place to start the real research anyway.

https://docs.google.com/spreadsheet/ccc?key=0AiCyYoc2ERYzdFdsUXhJY19BbjNpcVJxS0Y2WnZSQWc&usp=sharing

Let me know if you find those 3-5 really good picks you were hoping for!

p.s. I will have to tackle the companies with Morningstar ratings below 3 stars (or unrated) at some point.

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#4) On June 12, 2013 at 3:58 PM, JohnCLeven (75.58) wrote:

Just skimming the results...BLL and HAS are solid businesses that definitely require a closer look. For me anyways.

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#5) On June 12, 2013 at 4:35 PM, ElCid16 (96.87) wrote:

Killer stuff.  Thanks man.

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#6) On June 18, 2013 at 9:41 AM, elcid24 (78.20) wrote:

JCL,

Here's my list of "favorites" from your screens:

ACN, AET, BLL, CPB, COH, DPS, HAS, ITW, LO, M, JWN, OMC, PH, RTN, ROST, GPS, UNH, WYN

I got here by removing mega-caps, companies trading higher than a 17 forward P/E, companies not returning at least 5.5% per year on average in buybacks + dividends, companies not paying at least a 1% dividend, and companies whose annual CapEx was higher than annual earnings.  I also removed tech companies.

I know this is leaving out a few potential winners (K, GIS, HOG, TJX, NSC, CA, RNR).  But at some point, I guess you have to down select from 40 to 20.  I don't have the portfolio size (or the desire) to keep 40-50 stocks in RL.

On a side note, what are your thoughts on entry points for great companies?  I'm not sure that I like my self-selected forward P/E screen.  Lately I've tried to get away from ignoring companies simply because they trade >20 P/E.  Companies like SBUX, WFM, KORS, CMG, KO, GIS, MCD come to mind.  I own KORS and SBUX, though I got into SBUX during its big correction last year in the mid-$40s.  I'm not sure I'm ready to sell because it's back up to a 30+ P/E.

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#7) On June 18, 2013 at 12:40 PM, JohnCLeven (75.58) wrote:

Elcid, it’s good to hear from you. I’m glad you’ve found the screens worthwhile.

 

I like your list.

BLL, COH, DPS, HAS, LO, JWN, OMC, ROST, GPS have all been looking like pretty good candidates lately.

AET, ITW, M, PH, RTN, UNH, and WYN are a few that I don’t have as strong opinions on. They’re mostly outside my circle of competence (AET, ITW, PH, Insurance and industrials are two areas I generally don’t understand well enough), or tough to predict due to factors outside of the businesses control. (RTN with gov’t spending, UNH with new healthcare laws etc)

 

So my thoughts on entry points…

Good question, probably one I have not spent enough time considering. Especially, for great companies.

I’m just gonna rant in stream of consciousness, I hope you find my babbling is worthwhile.

 

Basically: I think the longer you plan on owning a company, and the more confident you are in where the company will be in 20+ years…the less entry point matters. Here are two examples:

 

1. I bought MCD a few months back at $84 bc MCD had dropped like 20% and was down to a PE of 15. The S&P was also at 15x earnings. WHY did I do this? 15x earnings isn’t that cheap.

Here’s why: there are very, very few companies that I really believe are ALMOST CERTAIN to be bigger, better, and badder 20 years from now. MCD is one of them.  I actually worked at MCD for 3 years from age 16-18. I understand MCD better than most.

So when I can buy a mega-quality company like MCD after a 20% drop, at 15x earnings,  the same multiple as the market at the time, especially when it’s a reasonable multiple, I BUY!

I’m currently 24 years old, and I think there’s a 50-50 chance that I will still own the same MCD shares I bought in 2012 in the year 2042. So with a 30+ year horizon, my entry point for MCD doesn’t matter as much, as it might for more of a medium-term investment.

 

2) I bought AAP at $67 in October 2012, when it was selling at 10x free cash flow. I thought the numbers looked amazing. ROIC, earnings, cash flow growth, buybacks, consistency, etc. However, unlike MCD, I probably won’t own AAP for 30 years. AAP has some great quality numbers, but I don’t understand their competitive advantage (or lack thereof) like I do with MCD. I am virtually certain MCD will still dominate (aka maintaining extraordinary returns on capital) in 20 years, but I don’t know where AAP will be in 20 years. AAP is probably a 2-4 year holding, MCD is a 30 year holding.

I thought 10x free cash flow was a low enough price that AAP was the best option available, compared to all my other investment candidates at the time. The low valuation provided a margin of safety to compensate for a lower level of long-term conviction. With MCD, time itself is my margin of safety.

I think when Buffett bought KO isn’t wasn’t too much cheaper than the market as a whole. I think time itself was Buffett’s margin of safety with KO, as well.

 

Once in a while, you get the best of both worlds…almost 100% long term conviction AND a cheap price. I bought BRK.B about 12 months ago, at like 1.15x book value, and I’ll probably never sell it. However, you usually DON’T have a best of both worlds situation, and instead have to kind of choose between the MCD type (wonderful business fair price) and AAP (A good business, but probably not a wonderful business, at a really good price) That’s the toughest part for me, taking my 5 or 6 best ideas and choosing the BEST 1 or 2. (You could argue that I should just buy all 5 or 6 and not have as concentrated a portfolio, but I prefer not to do that.)

Where it gets real tough is when you have SBUX at like 19x earnings vs slower growing KO at 17x earnings. Which is a better entry point? No one really knows, bc no one can really predict the future. That's why investing is an art, not a science.

Did that ramble answer your question at all?

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#8) On June 18, 2013 at 3:35 PM, JohnCLeven (75.58) wrote:

One other thing. I use Punnent Squares a lot.

I take my top candidates, and I essentially make a Punnent Square for all of them.

Remember these from elementary school?

http://en.wikipedia.org/wiki/Punnett_square

I ask myself 4 questions: 1)what is the most (conservatively) realistic growth rate I can conservatively expect from this company over the next 5 years? 2) What is my everything-goes-way-worse-than-expected growth rate? 3) What is my most realistic multiple? 4) What is my bear multiple?

Then I use a Punnent Square to show me the 5 yr price per share outcomes of all of those options. 1) realistic growth and realistic multiple, 2) realistic growth and bear multiple, 3)bear growth and realistic multiple, 4) bear growth and bear multiple.

Notice I lean on the conservative side. I don't ever estimate bull growth or bull multiples. I find comparing two companies bear-bear rate of return to be very helpful.

Example: Company A has $2 per share in eps. I estimate a 5 yr realistic growth rate of say 8%, a 5yr bear growth rate of 4%, a realistic multiple of 15x, and a bear multiple of 12x.

The eps calculations comes to $2.43 in yr 5 with 4% growth, and $2.94 with 8%. Bear multiple shows 12*2.43 = $29.16 yr 5 share. In the other 3 scenarios We get 5 yr share prices of  $35.28, $36.45, and $44.10, respectively.

If Company A is selling for $24 right now, this comes out to 5 yr annualized rate of returns of 3.97%, 8.01%, 8.72%, and 12.94%.

That's awesome. 4% returns if everything goes wrong, 8% returns if things don't go quite as well as we estimated, and 13% returns if our estimations are spot on.

If the company does ever better, and/or Mr. Market rewards your stock with a higher multiple, your annualized gains will be even higher than 13%...that's icing on the cake.

So I use Punnent Squares to compare my top 5 or 10 ideas. It helps me make decisions...even if it's unorthodox.

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#9) On June 18, 2013 at 3:35 PM, JohnCLeven (75.58) wrote:

So when I have a tough call between two companies...I usually go with the one with a higher bear-bear rate of return.

I hope that made sense.

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#10) On June 18, 2013 at 9:52 PM, elcid24 (78.20) wrote:

In regards to your MCD purchase - it sounds very similar to my SBUX purchase from 2012.  It was a company I admired and a stock I wanted to own.  I felt that it finally got too cheap when it hit $44 and I decided to pull the trigger.  I'm glad I did.

It's sometime difficult for me to compare 2 companies side by side, because it would be akin to comparing apples to oranges.  I'll give you 5 of my current RL holdings: DWA, MLR, SODA, JMBA, and ROST.

DWA was an investment I made simply because of what the companies does and what the brand represents.  More of a Tom Gardner pick, I guess.  Shrek, Madagascar, Kung Fu Panda, How to Train Your Dragon, The Croods - all blockbuster franchises.  I didn't feel this company deserved to be valued at $1.5B when Pixar was bought by Disney for $7.5B.  I still think it's too cheap at $2B.  I'll probably hold this one for a while.

MLR was an investment based on a thesis of mispriced operating assets and a down cyclical period.  The net cash balance is equal to 25% of the value of the entire company.  I also purchased SUP and FF as mispriced asset plays.  These are the 3 companies I'm most eager to potentially unload, but that's because I've watched these sit flat while the market's gone up.  I should probably practice a bit of patience.

SODA was a situation where I felt the market was mispricing growth.  (I feel the same way about KORS.)  I love using Google Trends as a predictor for growth.  As long as that trendline is going up, I have no reason to suspect that growth will take a substantial hit.

JMBA is a turnaround story unfolding (seemlingly) perfectly.  Their transition from a store ownership model to a franchised model is going to drive CapEx down into the dirt.  There's a great article on Seeking Alpha about the turnaround right now.  As soon as shares hit $3 they did a 1:5 reverse and it worked like a charm.  Volume (institutional investors) flooded in immediately.

ROST.  You know why I bought Ross.

So it's just kind of tough to compare these companies to each other.

 

 

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#11) On June 19, 2013 at 10:20 AM, JohnCLeven (75.58) wrote:

You said, “It's sometime difficult for me to compare 2 companies side by side, because it would be akin to comparing apples to oranges.”   While the business models, and reasoning for each of your 5 picks vary widely, I personally think it is critical NOT to view them as apples and oranges. 

The value of a business is the total of the net cash flows expected to occur over the life of the business, discounted by an appropriate interest rate."So valued," Buffett says, "all businesses, from manufacturers of buggy whips to operators of cellular telephones, become economic equals." (aka apples to APPLES)

 

Ask yourself:

-If you had to bet on which of your 5 holdings has the highest probability of resulting in a permanent loss of capital, which would you choose? Which has the least probability?

-Laws of economics state that companies aren’t supposed to maintain a high ROIC over time, which of your 5 picks is most likely to still have high ROIC in 10 years? Which are you least confident in?

-If someone gave you (or a management team you’d hire) $50 billion to try and compete against your 5 holdings…which of your 5 picks would be most likely to suffer from the economic onslaught? Which would be the toughest to hurt aka have the widest economic moat/durable competitive advantage?

-If you had to put 100% of your net worth into in 1 of your 5 companies, for 5-10 years, which would you choose?

 So yea…it’s REAL tough determining the VERY best from the merely exceptional. But investing ain’t for sissies. Good luck, and I really enjoy our exchanges!

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#12) On June 19, 2013 at 2:25 PM, elcid24 (78.20) wrote:

The value of a business is the total of the net cash flows expected to occur over the life of the business, discounted by an appropriate interest rate.

One way to value a company, yes.  :)

So if a company owned enough real estate to cover Delaware, but didn't make money, would it be worth $0?

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#13) On June 19, 2013 at 3:53 PM, JohnCLeven (75.58) wrote:

Assuming they didn't have a significant dent problem, that company would be worth more than $0.

I guess it would depend on if they could realistically sell that real estate, and at what price. There can be a stark contrast between the stated value of an asset on a balance sheet, and the real world liquidation value.

There are some investors that do that all day, every day. Evaluate hidden assets and liquidation values.

I've not ventured into that arena yet, and i'm not sure that I ever will.

Good question.

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#14) On June 20, 2013 at 12:48 AM, Zakrooster (72.43) wrote:

I have a quesiton for anyone that cares to answer. I was wondering a good way for you to find the 10year average ROIC?  The way I would do it would take a very long time. Are there any shortcuts or places where the work is already done?

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#15) On June 20, 2013 at 9:26 AM, JohnCLeven (75.58) wrote:

I copy and paste the 10 yr numbers from Morningstar.com into excel and it automatically calculates the avg.

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#16) On June 20, 2013 at 10:52 AM, JohnCLeven (75.58) wrote:

I also check valueline, for a 2nd opinion, and make sure the numbers aren't radically different than M*.

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#17) On June 21, 2013 at 2:01 AM, Zakrooster (72.43) wrote:

Thanks!   That was exactly what I was looking for! 

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