What is the truth about U.S. equities?

Discussing U.S. equities inevitably brings up one term: share buybacks. Some call it the secret weapon behind the long-term rise of U.S. stocks; others view it as a tool companies use to manipulate share prices. The reality is far more nuanced. After generating cash, companies generally have several options: reinvest in their business, acquire other firms, repay debt, pay dividends, repurchase shares, or simply retain the cash on their balance sheet. Share repurchases are merely one form of capital allocation. Whether they create value for shareholders hinges not on "how much" is bought back, but rather on the price paid and whether there are better alternative uses for that capital. Suppose a company’s stock is trading significantly below its intrinsic value, and its business does not require substantial new capital investment. In such cases, if management uses cash to repurchase and retire shares, the remaining shareholders’ proportional ownership stake in the company increases—and earnings per share (EPS) and cash flow per share may improve accordingly. Under these conditions, buybacks can be highly effective. Conversely, if the stock price is already extremely high, yet management still conducts large-scale buybacks—primarily to boost EPS—the action may effectively amount to using all shareholders’ money to overpay for the company’s own shares. Even worse, some firms simultaneously issue massive amounts of stock-based compensation while announcing huge buyback programs; as a result, the total number of outstanding shares shows little net decline, with the cash merely offsetting dilution. Although headlines may sound impressive, actual benefits to shareholders remain minimal. In the past, I used to get excited whenever a company announced a buyback program. Later, however, I began scrutinizing cash flow statements and share count data—and realized there’s a big difference between an authorized buyback and actual execution, and between “spending a lot of money” and “increasing per-share value.” A buyback program is most akin to an exam: it tests whether management allocates shareholders’ capital where it generates the highest return. U.S. companies broadly emphasize shareholder returns—a key part of the market’s appeal. Dividends and buybacks allow corporate profits to flow back to investors. Yet neither is magical. If a company relies on debt-financed buybacks while neglecting R&D and maintenance, its short-term per-share metrics may look prettier—but its long-term competitiveness could suffer. Sound capital allocation must consider the balance sheet, valuation, and underlying business opportunities holistically. In our U.S. equity asset allocation discussion group, when analyzing earnings reports, we routinely append three lines after “buyback amount”: average repurchase price, change in total shares outstanding, and stock-based compensation issued during the same period.

U.S. Occidental Petroleum (OXY.US) turned profitable last quarter and raised its dividend to $0.13 per share.

Gulon Finance, February 25 — Occidental Petroleum Corporation reported fourth-quarter net income of $1.34 billion for the period ended December 31, reversing a $1.31 billion net loss in the same period last year. Adjusted earnings per share were $1.48, surpassing the consensus estimate of $1.10. The company raised its quarterly dividend to $0.13 per share. Occidental stated that its average daily production for the quarter was 1.9 million barrels—49,000 barrels higher than the midpoint of guidance. Its average realized oil price was $75.39 per barrel, up 85% year-on-year.