Return to shareholders.
These three simple words drive investors crazy. If I had a dollar for every time a company mentioned these words in their financial reports, I’d be a very wealthy man indeed. Whether through dividends or share repurchases, investors can’t seem to get enough of either capital allocation carrot.
Dividends I get. If a company has been paying out part of its annual earnings for 50 years, why stop now when its shareholders, like drug addicts, need a fix now and again, preferably one that’s bigger each and every time? Besides, it’s hard to deny the success of dividend investing over the long haul. When done properly, it actually works.
Share repurchases, on the other hand, have a much spottier record of delivering results for companies large and small. In 2014 Reuters looked at more than 3,000 publicly traded U.S. companies, all non-financial in nature, and they found that more dollars were paid out for dividends and share repurchases that year than the combined net income of those same companies. It was the first time in history for this to happen outside periods of recession.
The other big problem with share repurchases, other than the fact that this allocation robs a company of its innovation and growth, is the simple truth that many companies do a miserable job buying back their stock by overpaying.
To evaluate a company’s success or failure when it comes to buybacks, I use a simple process that compares the average price paid in a fiscal year to the average trading price (the midway point between its high and low) in that same year. If it manages to pay less than the midway point, it’s doing a good job buying back its shares; if it pays more, it’s doing a bad job.
So, which stocks did better than most in 2015?
Rather than analyze all 238 stocks in the TSX Composite Index in 2015, I took a shortcut by examining the top 10 stocks in the S&P/TSX Composite Buyback Index, a group of 50 stocks with the highest buyback ratios in the TSX itself. Those in the top 10 had the highest ratios, which are calculated by dividing the dollar value of share repurchases in a given year by a company by the market cap of its stock at the beginning of the year in question.
Here’s what I found out.
In 2015 Gran Tierra Energy Inc. (TSX:GTE)(NYSE:GTE) managed to do the best job of the top 10 when it comes to buying buy back its stock. It paid $2.19 per share, 24.7% less than the midway point of its high ($3.95) and its low ($1.87). No one came close to that.
The top 10 runner-up was Methanex Corporation (TSX:MX)(NASDAQ:MEOH), which managed to pay $49.65 in 2015 to repurchase its shares, 15.2% below the midway point between its high of $74.43 and its low of $42.60. Anytime you can deliver double digits from this metric, you’re doing well.
The third spot belongs to business intelligence provider Avigilon Corp. (TSX:AVO), which managed to buy back its stock in 2015 for $16.11 per share, 12.5% less than its high-low midway point of $18.41.
Who didn’t perform so well?
Auto parts distributor Uni Select Inc. (TSX:UNS) was the least effective of the top 10, paying $50.83 per share in 2015, 11.4% more than its high-low midway point of $56.63.
So, how did your favourite stock do in 2015?