3 large-cap stocks to buy if you love stock buybacks

Investors tend to focus on two significant aspects of their stock holdings, especially when measuring whether they are winning or losing. One is undeniably price appreciation – or lack thereof – and another is whether they are paid a relatively constant dividend.

However, there is a third, often forgotten aspect of measuring winning stocks. When management decides to buy back the shares, the magic begins.

Warren Buffett is known for investing in big companies before they become big. For the moment these giants, like The Coca-Cola Co. NYSE: KOby starting to buy back shares, early shareholders like Buffett get most of the benefits.

This is why you should look at stocks like eBay Inc. NASDAQ: EBAY, Ross Stores Inc. NYSE: ROSTand even Simon Property Group Inc. NYSE: GSP buy back a good portion of the shares today.

Stock buybacks: It’s basically free money

Most investors have a good feeling when they receive a dividend payment; however, this is not the most efficient way to be rewarded. Because dividends come from a company’s free cash flow (operating cash flow minus capital expenditures), the government taxes that money.

With some minor exceptions, when you receive a dividend payment, you will also be taxed at ordinary income rates. Why should you pay a double tax on money that should instead be invested at a decent rate of return and compounding?

A better and more efficient way to be rewarded as a shareholder is through share buybacks. When management buys back shares, the quantity of shares outstanding is reduced. In other words, you now own a bigger slice of the same pie!

Ideally, you would be invested in a growing pie, like the stocks mentioned here today.

eBay is simply built differently

While most tech stocks continue to hit new all-time highs, eBay is far from top class Nvidia Co. NASDAQ:NVDA is found. Far from its all-time high price, eBay management understands that the stock may be undervalued today, which is one reason to buy back shares.

Analysts at Barclays New York Stock Exchange: BCS they believe eBay stock could go as high as $61 per share, predicting a rally of up to 17% from today’s prices. Management doesn’t seem alone in believing the shares are cheap today, which is why 8.1% of total shares will be repurchased.

But that is not all; Fisher Asset Management also stepped in to buy the shares. Increasing their stake by 43.8% this month, which represents a transaction of around $163,000, bets are off for this stock to rise again.

Could the contagion from Nvidia’s rally spread to eBay too? Perhaps, although management and analysts already see the writing on the wall.

A retailer worth buying

Ross Stores management sees high potential in purchasing its shares. You see, the company generates an average rate of return on investment capital (ROIC) of more than 12%. This means that any capital used to buy back shares is set to potentially earn a rate of return above 12%.

This is the thing that investors like Buffett love as the value of the business is now set to compound on itself. By announcing a 4.3% buyback, you can expect up to $2.1 billion to be reinvested in Ross shares.

As share buybacks reduce the number of shares outstanding, earnings per share (EPS) also increase. That said, analyst projections for 10% EPS growth over the next 12 months could be pushed higher after these buybacks.

Furthermore, the analysts of The Goldman Sachs Group Inc. NYSE:GS see a valuation for Ross as high as $163 per share. The stock would need a 12% rally to prove they are right. With potential interest rate cuts coming from the Federal Reserve (the Fed), it’s not too far-fetched to imagine that consumer activity could drive Ross’s EPS much higher.

You get the best of both worlds here

Now for the double whammy: Simon Property Group is the stock that offers the most efficient way to receive dividends and a potential discount based on management’s willingness to repurchase shares today.

As part of real estate investment trusts (REITs), Simon Property gets a little break from Uncle Sam regarding how much tax it has to pay on rental income, which funds the 5.2% dividend.

But even after a 50% rally over the past two quarters, management still believes the stock could climb much higher. In the coming months, up to 4.2% of the outstanding shares will therefore be repurchased. No wonder those a Piper Sandler Companies New York Stock Exchange: PIPR they see up to 15% upside in their $172 price target.

Before you consider Simon Property Group, you’ll want to hear this.

MarketBeat tracks Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients on a daily basis. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and Simon Property Group wasn’t on the list.

While Simon Property Group currently has a “Moderate Buy” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here