These 3 companies are trending higher after share buybacks

Investors have a few ways to get their money back once they invest in a stock. The most common way to harvest returns is to simply sell a stock, hopefully, at a higher price. The second way is to collect dividends. Dividend stocks are the bread and butter of some retail investors; However, it’s not all sunshine and rainbows.

Dividends are paid from a company’s free cash flow (operating cash flow minus capital expenditures) unless the company takes on debt to pay the dividends, which should be a red flag. Because free cash flow is taxable, investors receive dividend payments with taxed money, only to be taxed again as ordinary income on the dividend received.

Double taxation sounds terrible, and it is. This is why share buybacks are a much better and efficient way for management to reward shareholders. Actions like FedEx Co. New York Stock Exchange: FDX, Ulta Beauty Inc. NASDAQ:ULTAand even Ross Stores Inc. NASDAQ: ROST they are aggressively buying back their own shares.

Regardless of the merits of individual companies, here’s why stock buybacks may be the best way for investors to see their returns.

It’s basically free money

Companies issue a limited amount of shares to the market, meaning the size of the pie is set for shareholders to take a slice of what is available. If an investor owns 5 shares out of a total of 20 available shares, he owns 25% of the company. Now, when management decides to buy back 5 shares, the investor owns 33% of the company (5 shares out of 15 total).

Stock buybacks allow investors to own a more significant slice of the pie. Ideally, the company is solid and is expanding its profits so that the pie grows bigger. A vicious upward cycle is now created. The best part is that this money is only taxed once at the free cash flow level. Therefore, the reward for the investor comes from higher value stock holdings.

FedEx buybacks aren’t just about convenience

After announcing a 15% increase in earnings per share (EPS) over the past 12 months, FedEx reported $1.6 billion in free cash flow in its latest quarterly financial release. Knowing what could happen to the stock, management decided to increase its 2024 buyback program to $2.5 billion.

As a $71 billion company, these buybacks represent 3.5% of the company’s size. Trading at a price-to-earnings (P/E) ratio of 16.4x puts FedEx at an 8% discount to its closest competitor, United Parcel Service Inc. NYSE:UPS. While this may seem like an initial reason to buy cheap stocks, the logic doesn’t stop there.

According to the latest report on the employment situation, the courier and delivery sector created 17,300 jobs in February. This represents approximately 6.2% of the 275,000 total jobs added to the U.S. economy. A hiring spree can only mean more deals on the horizon.

Knowing this, analysts Bank of America Co. NYSE:BAC they felt comfortable raising their price targets for FedEx stock to $346 per share. To prove them right, the stock needs to rise 19% from where it trades today. The price action favors this logic, as the stock wants to break out of its 52-week high again.

Ulta Stock: A play for the ages

Ulta Beauty has created a moat around its business model as part of the consumer staples sector. Whether the economy is booming or busting, consumers will continue to meet their skincare and beauty needs, making Ulta immune to the cycle.

Furthermore, the brand’s value proposition and penetration are so efficient that more than 90% of customers become and remain members of the brand’s network.

No other retail stock has reported such high adoption rates, which is why return on invested capital (ROIC) rates are so high, a five-year average of more than 25% according to Ulta financials.

Starting in March 2024, Ulta management has decided to increase its buyback program to $2 billion, which would repurchase up to 7.3% of all outstanding shares. Raymond James New York Stock Exchange: RJF Analysts believe the stock could reach $630, a level 21% higher than today’s price.

The moat around its product and high profitability rates make Ulta a stock that investors may consider holding for the long term. As management buys back more of its shares, buyback investing now works at rates of return of 25%, increasing the value of shares more quickly for those looking to grow their wealth.

Another round of Ross Stock play

Markets were potentially pricing in interest rate cuts by the Federal Reserve this year. Expectations of lower interest rates and higher consumer confidence from 2021 may make Ross a crucial player for consumer discretionary stocks.

Now that the situation is now clear, analysts a The Goldman Sachs Group Inc. NYSE:GS they raised their targets to $163 per share, defying the stock’s 12% rally.

Insiders may see this as a potential outcome because they have announced a $2.1 billion buyback program that could buy back up to 4.3% of total shares on the market.

Ross outperformed the SPDR fund for selected consumer discretionary sectors NYSEARCA: XLY by 16% over the past 12 months, and the stock continues to flirt with new all-time highs demonstrating the momentum behind this strength.

Before you consider the Consumer Discretionary SPDR Fund, you’ll want to hear about it.

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 the SPDR Consumer Discretionary Select Sector fund wasn’t on the list.

While the SPDR Consumer Discretionary Select Sector Fund currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.

View the five stocks here