The third quarter 2018 earnings reporting season is drawing to a close, and about 90% of the companies in the S&P 500 Index (SPX) have issued their reports, per Goldman Sachs. This means that share repurchases, or stock buybacks, are now set to resume in earnest, given that most of the S&P 500 is now exiting the blackout period imposed by the SEC on this activity during the reporting season. Through a combination of dividends and spending on stock buybacks, some companies have been offering very handsome returns of capital to investors.
These nine stocks are among the leaders in this regard, per the most recent U.S. Weekly Kickstart report from Goldman: Marathon Petroleum Corp. (MPC), Phillips 66 (PSX), Discover Financial Services (DFS), Cisco Systems Inc. (CSCO), Sealed Air Corp. (SEE), Union Pacific Corp. (UNP), Boeing Co. (BA), Corning Inc. (GLW) and NetApp Inc. (NTAP). Details on these stocks are in the table below.
9 Stocks With Hefty Buyback-Driven Yields
|Stock||Dividend + Buyback Yield||2019 EPS Growth|
Source: Goldman Sachs
Significance For Investors
Goldman's buyback basket includes 50 stocks, with a median combined yield over the last 12 months from dividends and share repurchases that is 11%, versus a median of 4% for the S&P 500 as a whole. The median estimated 2019 EPS growth rate for stocks in the basket, based on consensus estimates, is 11%, versus 9% for the S&P 500. In selecting the nine stocks listed above, we took those with the highest trailing yields that also have projected 2019 EPS growth of at least the basket median, which is 11%. All except Sealed Air, which is at 1%, have trailing yields from dividends alone that equal at least 2%.
Best known as the developer of bubble wrap, Sealed Air also offers a number of other packaging products and automated packaging systems that facilitate safe shipment of fragile goods. The company also offers highly specialized packaging for the safe distribution and storage of various food and medical products. The stock is one of the biggest recent losers in Goldman's basket, down by 29.7% from its 52-week high as of the market open on Nov. 12.
In fact, the stock is down by about 40% from its peak in 2015, per Seeking Alpha. The good news is that Sealed Air reported strong results for 3Q 2018, with growth in all its regions and business segments. The bad news is that management indicates rising cost pressures, and has lowered its guidance for 2019. Nonetheless, Seeking Alpha sees positive long term potential, based on expanding profit margins and the fact that the rising U.S. dollar meant that strong growth in overseas sales, which account for 45% of the total, was masked in the currency-adjusted totals.
Recent acquisitions should help Sealed Air become a bigger player in the so-called Ships in Own Container (SIOC) market, according to Seeking Alpha. These are packages that are sent to the end customer without the need for additional packaging, per Cascadia Seller Solutions, and are increasingly being demanded by an increasing number of distributors, including leading online merchants.
At the other end of the 2018 stock performance spectrum among the nine stocks is Cisco Systems, up by 26.8% year-to-date (YTD) through the open on Nov. 12, per adjusted close data from Yahoo Finance. A longtime leader in computer networking solutions, Cisco also supports efforts to enhance cybersecurity, expand cloud computing services, and advance cutting-edge technologies such as artificial intelligence (AI) and the Internet of Things (IoT), in which smart devices communicate with each other.
The Motley Fool indicates that the growing importance of cybersecurity and the growing market penetration of Cisco's SD-WAN networking technology bode well for the company's future. Also, Cisco repatriated about $67 billion of cash pursuant to the 2017 tax legislation, returning much of it to shareholders through share repurchases and dividends.
While 3Q 2018 EPS beats are running above the long term average (56% vs. 46%), revenue beats are below average (31% vs. 35%), per Goldman. Consensus EPS estimates for the S&P 500 in 2019 are trending downwards, already down by 1% since the end of 3Q 2018. Goldman has raised its own top-down S&P 500 EPS estimates for 2019 and 2020, but their expected growth rates are now 6% and 4%, down from 7% and 5% previously. The outlook for dividends and share buybacks in 2019 will depend heavily on corporate earnings, which face headwinds from slowing GDP growth and rising costs.