Economists’ projections for an incredible U.S. rebound in 2021 are coming true. In the stock market, this year may go down as “the year of the buyback.”
In April, U.S. companies announced $208 billion in new buyback programs, the second-highest monthly amount since June 2018. According to data provided to the Wall Street Journal by Goldman Sachs, buyback authorizations during 2021 totaled $504 billion — the most in at least 22 years.
Net buybacks — those large enough to lower the share count by mitigating the dilution caused when company boards of directors hand new shares to executives — are important to investors because they increase earnings per share. Higher earnings per share, or EPS, typically support higher stock prices.
Why are companies getting set to buy back so much stock? Because they curtailed capital deployment in 2020 to protect themselves from the disruption of the coronavirus pandemic.
Now, during a rapid economy recovery, the U.S. money supply has increased dramatically, as the Federal Reserve has grown its balance sheet through bond purchases. Very low interest rates have also helped set the stage for buybacks.
The largest U.S. banks were required by the Federal Reserve to stop buying back shares last June because of the pandemic. The group’s capital ratios have increased and the Fed has announced that banks will be allowed to resume buybacks after June 30, when the regulator’s annual stress tests have been completed.
One way to measure a company’s ability to deploy capital is to look at its free cash flow yield. This can be done on a trailing basis, but 2020 was a year of disruption, to say the least. So the following data is based on free cash flow projections for 2021 among analysts polled by FactSet.
A company’s free cash flow is its remaining cash flow after planned capital expenditures. It is money that can be used to repurchase shares, increase dividends or for other corporate purposes, including acquisitions or expansion.
If we divide a company’s estimated free cash flow per share by the current share price, we have an estimate of free cash flow yield. If we subtract the current dividend yield from the FCF yield, we have estimated “headroom” for capital deployment — including buybacks and dividend increases.
Free cash flow estimates aren’t available for financial companies or for real estate investment trusts (REITs).
Now that we know what to look for when trying to identify companies that are well-positioned to repurchase shares, it might also be interesting to narrow the field to “growth” companies — those with typically more rapid sales and earnings growth.
To review a group of growth stocks, we began this stock screen with the Vanguard Russell 1000 Growth Index ETF
which tracks the Russell 1000 Growth Index
(The iShares Russell 1000 Growth ETF
tracks the same index.) You can read how FTSE Russell describes the makeup of its indexes here.
The Russell 1000 Growth Index is weighted by market capitalization. So the largest position of VONG is Apple Inc.
which makes up 10.5% of the portfolio. Using Apple as an example, analysts polled by FactSet estimate the company’s free cash flow per share for calendar 2021 will be $5.61. (We’re using the calendar year to keep the data uniform. Some companies, including Apple, have fiscal years that don’t match the calendar.)
If we divide Apple’s projected calendar 2021 FCF by the closing share price of $127.45 on May 14, we have an estimated FCF yield of 4.40%. If we subtract the current dividend yield of 0.69% from the FCF yield, we have estimated “headroom” of 3.71%. Relative to the dividend yield, it appears Apple will have plenty of extra cash to deploy.
Going back to the Russell 1000 Growth Index and excluding the financials and REITs, we’re left with 437 companies and FactSet has calendar 2021 FCF estimates for 350 of them.
Here are the 20 companies with the most free cash flow “headroom,” based on consensus estimates for calendar 2021.
Note: Scroll the table to see all the data.
There are actually 21 rows of data on the table, because it includes both Liberty Media Corp.’s Series A
and Series C
shares for Liberty Sirius XM.
The company with the highest expected FCF yield of 17.70% for calendar 2021 is Nexstar Media Group Inc.
which also has the highest projected headroom of 15.84%.
Next is Moderna Inc.
which has had extraordinary success with its quick development and deployment of a COVID-19 vaccine. Its estimated FCF yield for 2021 is 14.47%, and that’s also its estimated headroom because it pays no dividend on common shares. To be sure, a growth-stage company providing such a critically important product that had to raise money by issuing shares less than a year ago cannot be expected to repurchase shares this year. This shows the limitation of any stock screen and the need to do your own research whenever you consider an investment.
Next on the list is CommScope Holding Co. Inc.
with an estimated FCF yield of 12.11% for 2021. With no dividend, that’s also the expected headroom figure.
- Dell Technologies Inc. ranks fourth, with a FCF yield and expected headroom of 11.85%. This is another stock with no dividend currently.
- Fifth is NRG Energy, with an estimated FCF yield of 15.35%, a dividend yield of 3.79% and expected headroom of 11.57%.
If you scroll the above list to the right, you can see that 10 of the companies have market capitalizations of less than $10 billion. So here’s a list of the largest 20 companies in the full list of 350. You can see that two very-well-known names have have little projected FCF headroom — and there’s a good reason for that.
Once again, the list of 20 companies actually has 21 rows of data, because two share classes of Google holding company Alphabet Inc.
are included. The company doesn’t pay a dividend on either share class. The estimated yield and headroom are 3.91% for the Class C shares and 3.98% for the Class A shares.
Following Apple, which is discussed above, the second-largest company on the list is Microsoft Corp.
with an estimated FCF yield of 3.12% and a dividend yield of 0.90%, leaving estimated headroom of 2.22%. That’s significantly lower than Apple’s estimated headroom of 3.71%.
The company on the list with the lowest estimated FCF yield for 2021 is Netflix Inc.
which for years has plowed its cash flow into content creation. The company has turned a corner, with positive cash flow, and is set to resume buying back shares after a 10-year break.
Second-lowest for estimated FCF headroom on the list is Tesla Inc.
which is also in a rapid-growth phase, with several factories under construction.
Among the 20 largest companies listed, AbbVie Inc.
has the highest estimated FCF headroom of 4.59%. Its estimated FCF yield for 2021 is 9.05% and its dividend yield is 4.47% — the highest for any company listed in this article.