Judging by the numbers, buyback plans remain extremely popular.

In the S&P 500, 374 companies, or 75% of the index, bought back shares in the third quarter, according to Factset Research. Those companies spent $567 billion as of the end of the third quarter on a rolling 12-month basis. That’s up 27% from the prior 12-month period. Those are stunning numbers.

Yet a debate is raging in investment circles. Are share buybacks the best use of corporate funds?  And equally important, are they a boon to investors that are in search of market-beating stocks?

#-ad_banner-#The first question goes to the heart of capital allocation. Deploying funds toward buybacks can lead to a hike in debt, stunt the growth of dividends or starve capital spending plans of badly-needed fuel. To be sure, some companies, especially those that bought back shares when they traded at much higher levels, didn’t make the right choice.

But for investors, buybacks are usually a clear positive. Since 2008, companies with the largest buyback programs by dollar value have outperformed the broader market by 20%, according to Barclays. The PowerShares Buyback Achievers ETF (NYSE: PKW) has delivered an 18.7% annualized gain over the past five years, compared to a 14.9% gain for the S&P 500, according to Morningstar.

I put that theory to a fresh test by looking at companies that have embarked upon the biggest buyback plans (as a percentage of the share count). Focusing solely on companies that have announced plans to re-purchase more than 15% of shares outstanding, it’s fair to ask two questions: First, did they follow through on their plan? And second, have shares outperformed since the buyback was announced?

To corral the companies in question, I looked at four buyback-related stories I wrote in 2014, which you can read here, here, here and here.

The following is the group of companies that announced such major buyback plans in 2014.

Company	Buyback As A % Of Market. Cap.
Carpenter Technology (CRS)	19.2 %
CarMax (KMX)	16.8%
Cree (CREE)	15.2%
3M (MMM)	25.5%
Herbalife (HLF)	17.1%
USANA Health Services (USNA)	20.0%
Apple (AAPL)	18.0%
Platinum Underwriters (PTP)	15.0%
Sina Corp. (SINA	16.0%

(Note: the percentage figure reflects the companies’ market value at the time the buyback was announced.)

The first order of business is to look at the trend in shares outstanding (fully diluted) to see if shares are indeed being reduced, or if the company is moving too slowly to have an impact. In many instances, these companies are lagging their promise of a rapidly-shrinking share count.

To be fair, some of these buyback plans were only announced a quarter or two ago, but if these companies are serious, then their share counts should be noticeably smaller at the end of the fourth quarter and should drop steadily in subsequent quarters as well.

Company	Q4 2013	Q1 2014	Q2 2014	Q3 2014
Carpenter Technology (CRS)	54.4	53.7	53.6	53.6
CarMax (KMX)	227.4	226.7	223.6	221.0
Cree (CREE)	123.2	123.7	122.4	121.1
3M (MMM)	681.3	674.5	669.6	657.9
Herbalife (HLF)	106.5	100.8	91.2	86.2
USANA Health Services (USNA	15.9	15.6	14.9	14.2
Apple (AAPL)	6310	6157	6052	5972
Platinum Underwriters (PTP)	28.1	26.9	25.2	26.0
Sina Corp. (SINA)	67.9	66.0	65.9	71.5

 

 

Companies, such as Herbalife Ltd. (NYSE: HLF), are indeed making rapid inroads in terms of a smaller share count. Still, shares trade off more than 50% from the 52-week high.

That yields a few key points. Any firms — such as Herbalife — that buy shares at much higher prices clearly wasted their money. If Herbalife spent hundreds of millions of dollars buying shares now — with the stock below $40 — then that would be a different story. The fact that Herbalife has also borrowed massive sums of money to fuel buybacks makes this all the more egregious.

As noted earlier, buyback programs generally have a beneficial impact on the share price. But do especially large programs (in relation to shares outstanding) deliver an especially strong boost?

No. In some instances, buybacks can send an important signal — this was the case for otherwise-healthy companies like Apple, Inc. (Nasdaq: AAPL) and 3M Co. (NYSE: MMM). But some stocks keep on sinking, despite a big buyback announcement.

Company	Date Of Announcement	Gain/Loss Since	S&P 500 Gain/Loss
Carpenter Technology (CRS)	23-Oct	-6.7%	2.4%
CarMax (KMX)	23-Oct	12.5%	2.4%
Cree (CREE)	27-Oct	4.6%	1.6%
3M (MMM)	4-Feb	26.7%	13.6%
Herbalife (HLF)	3-Feb	-40.5%	13.7%
USANA Health Services (USNA)	10-May	42.7%	10.6%
Apple (AAPL)	23-Apr	47.7%	6.3%
Platinum Underwriters (PTP	24-Jul	16.7%	0.0%
Sina Crop. (SINA)	11-Apr	-29.2%	10.1%

(Note: Some of these are extensions or enhancements of prior buybacks)

There are clear situations when massive buybacks are warranted. Platinum Underwriters, Inc. (NYSE: PTP) has been steadily reducing shares outstanding while they trade for less than tangible book value.

 

 

A large buyback plan can also help a plunging stock to find a floor. Roughly two months ago, I noted the precipitous decline in shares of Cree, Inc. (Nasdaq: CREE) on our sister site ProfitableTrading.com. I wrote, “Management may look to sharply bolster the current $300 million share buyback program, which has been in place since spring.”

A few weeks later, Cree boosted the share buyback plan to $550 million, which appears to have stopped the stock’s freefall (though it hasn’t yet lifted shares). Shares may regain their footing if investors see a sharply lower share count in coming quarters. Notably, analysts don’t tend to account for share buybacks in their earnings per share forecasts, so there is an upward bias to forward estimates for buybackers such as Cree.

 

Risks To Consider: One word: Herbalife. Whenever you see a company announcing a big buyback just to beat back short sellers, they are likely being reckless in their use of shareholder capital. You should always avoid companies that are using debt to buy shares, as Herbalife is doing.

Action To Take –> There’s a good reason to pay close attention to this group of stocks. Though the buyback programs have yet to have a major impact on the share count, they likely will in 2015. That should provide a level of defensive support as the companies are actively buying shares and as analysts lower their share count estimates and thus boost EPS forecasts. Cree and Platinum Underwriters stand out as my favorite stock buyback picks for 2015.

Companies that participate in healthy share repurchase programs might make a great addition to a Total Yield portfolio. Total Yield stocks are shareholder-friendly, dividend-paying companies that reduce debt and repurchase shares. And those that do these things wisely have proven to beat the market — even during the 2008 financial crisis and the dot-com bubble. To find out more about Total Yield investing, click here.