The purpose of a share buyback is to return capital to shareholders in a tax-efficient way, instead of paying dividends. In addition, buybacks are also a way for management to take advantage of situations when they feel the shares are undervalued, as well as to provide investors who want to sell shares with the necessary liquidity and a decent exit price.

At the same time, it also rewards investors who choose to stay invested in the company by allowing them to own more stake in the company percentagewise and by increasing earnings per share (EPS), as there are fewer shares outstanding to be divided for net income.

Companies that are buying back shares heavily could be an interesting starting point for investors to look for investment ideas, as this policy indicates a few important things:

• Companies that buy back shares aggressively have proven themselves to be a shareholder-friendly management team
• Management believes shares are currently undervalued and is disciplined in allocating capital to unlock value in a tax-efficient manner
• Buybacks also reduce reinvestment risks, as buying back a company’s own stock is mostly safer than making a brand-new acquisition that management is not familiar with

For instance, if investors pay attention to some of the most successful investments that Warren Buffett ever made, such as Coca-Cola (KO), Apple (AAPL), American Express (AXP), etc., the common theme among these investments is that these companies were buying back shares aggressively at the time of his purchase to take advantage of low valuations.

Of course, share buybacks are the starting point, not the end, and investors should not invest in companies solely because they are buying back shares, but rather consider other fundamental-related matters such as growth rate, debt levels, the competitive dynamics in the industry, risk of technological disruption, or whether the business is facing secular tailwinds or headwinds, etc.

Buybacks can also be a tool for management to take advantage of volatility to create shareholder value. Because mathematically speaking, the lower the share price, the more shares a company can acquire. For example:
Scenario 1: Company A spent $100 million on share buybacks at the current share price of $10. Company A can retire 10 million shares.
Scenario 2: Company A also spent $100 million on share buybacks, but due to macro uncertainty, the share price dropped to $8. Therefore, Company A can retire 12.5 million shares.

If the fundamentals of the company remain unchanged, volatility could be a friend for investors, as it allows the company to repurchase more shares with the same dollars invested. Below we have screened for companies with the following criteria:
• Repurchased shares equal to more than 6% of the market cap in the last twelve months
• Market cap larger than $100 million
• 5-year revenue compounded annual growth rate (CAGR)
• Net debt/EBITDA in the last twelve months

The criteria above reflect companies that have repurchased their shares for cancellation of at least 6% of the shares outstanding within the trailing twelve-month period. We believe 6% is a high threshold, as a consistent 6% reduction in share count could make a difference in terms of value creation over a multi-year period.

In addition, we also present these companies' important numbers such as 5-year revenue growth rate on average, net debt/EBITDA, Return on Equity (ROE), and forward P/E. As usual, we prefer companies that are over $100 million in market cap, as these companies have proven themselves to be more mature, self-sustainable entities.

We think there are some names within the list that look promising for members to do more in-depth research, such as GFL Environmental (GFL), Imperial Oil Limited (IMO), and Goeasy (GSY).

It is critical to note that not all share buybacks are created equal. In fact, buybacks only work if the company remains a strong business five or 10 years from now, as what really matters is the company’s terminal value. If the business faces a secular decline with the risk of going out of business (due to technology disruption, bankruptcy, etc.), then it does not really matter how many shares the company can buy back if the value of the company is zero 10 years from now. Share buybacks can act as a catalyst to unlock value, but the investment thesis can’t be solely based on it.

Lastly, these companies on the list are not recommendations, but rather a starting point that helps investors generate potential investment ideas.

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Disclosure: The analyst(s) responsible for this report do not have a financial or other interest in the securities mentioned.