A company generating cash flow has a number of ways to put that money to work. They can expand the business, whether through internal growth or acquisitions. When a company gets large enough, it may also make sense to reward shareholders with cash dividends.
But a company can also buy back its shares. That also rewards existing shareholders, as it reduces shares outstanding and increases earnings per share without growing the underlying business.
In today’s market, beaten down stocks embracing bigger buybacks may end up strongly rewarding shareholders.
One company that just upped its buyback now is Lowe’s (LOW). The home improvement retailer increased its buyback plan from $6.4 billion to $15 billion.
That sent shares higher, but the stock is still down about 21 percent over the past year. And the buyback amount at current levels equates to about 10 percent of the current share float.
Action to take: As a leader in the home improvement space, the share buyback should help the stock get back to its old highs down the line. And with shares at 14 times earnings, the stock likely has decent upside ahead in the next year. Plus, at current prices, the stock yields about 2.1 percent.
For traders, the March $230 calls, last going for about $6.00, offer mid-to-high double-digit returns in the months ahead.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.