An Easy Way to Find Good Stocks

Andy Snyder|April 27, 2023

Here come the politicians… the march of the stooges.

Google has announced another big stock buyback – some $70 billion worth.

It’s a healthy business that’s rewarding shareholders for risking their money on the company. That’s the way of the world. Folks wise enough to own shares of the tech giant are already up 20% this year.

But the vote-mongers… well, they’re wagging their crooked little fingers.

How dare Google “rig” its share price at the same time it’s laying off some 12,000 workers and focusing tightly on cutting costs?

It should be a crime, the rookie politicians say.

It should be taxed, the ones who have been around for a while demand.

Indeed, Biden has taxed buybacks. Uncle Sam now profits from these deals. He gets 1%. It hasn’t slowed companies from rewarding shareholders.

Nobody ever thought it would.

Even the curmudgeonly Warren Buffett – who seems to get grumpier by the day – agrees that buybacks are good. Anybody who’s against them is “either an economic illiterate or a silver-tongued demagogue,” he said recently.

That squares nicely with the talk from Washington… and the folks who want to clamp down on buybacks even more.

But what’s it all mean for you, dear friend?

We say buybacks are one of the finest indicators of stock health around. Few other metrics show profitability, cash flow and a management team’s yearning to reward shareholders better than this one simple idea.

But alas, there are caveats.

You may find it hard to believe, but there are bad people out there – folks who don’t always tell the truth.

Some companies make buyback announcements… but never bother to actually do any buying.

Others use buyback programs to cover up the massive dilution caused by executive stock option plans.

That’s bad.

Fortunately, a good buyback plan is easy to spot.

It’s Outstanding

It’d be nice if companies simply filled out a form and told us when they were buying and how much they were getting. There’s paperwork for everything these days… but that. It shows the real motive of the folks in charge. (Hint: It’s not to help you.)

Without the aid of direct reporting, we turn to the next best thing.

All we have to do is look at the number of shares a company has outstanding. If the figure is dwindling, the company has a buyback plan in effect and is doing what was promised. The share price is likely to go up.

If the number is flat or growing, buybacks may be happening, but other dilutive actions are having a greater impact. The share price is not likely to rise… at least not because of the buyback.

Be careful with those stocks. Management may not be the saviors they claim to be.

Here’s a chart that shows the number of Alphabet (Google’s parent company) shares outstanding…

View Larger Image

With a quick glance, we can see the effect of the company’s recent repurchases. There are about a billion fewer shares on the market today than there were three years ago.

At roughly $100 per share, you can do the math to figure out how much the company has spent.

And with Alphabet bringing in $13.6 billion in net income last year, it’s not hard to see the effect the repurchases have had on EPS by eliminating more than 5% of outstanding shares.

With that, it’s clear why so many politicians don’t like buybacks.

They make folks money.

And when you’re in the game of buying votes… that’s bad for business.