In early September, First Asset Canadian Buyback Index ETF (TSX:FBE) celebrated its first anniversary as an ETF. As ETFs go, its performance over the past year has been above average, beating the TSX Composite Index by 212 basis points through September 28 for a one-year return of 11.2%.
That’s an excellent debut.
You would have done even better if you’d bought the hedged version (FBU), which gained 17.4% through the same period on account of the strengthening Canadian dollar.
This time last year, I selected two ETFs holdings that I thought were doing a good job buying back their stock — Onex Corporation (TSX:ONEX) and Canadian Pacific Railway Limited (TSX:CP)(NYSE:CP) — something where very few companies excel.
Onex and CP had an average total return of 11.7% over the past year — 257 and 50 basis points, respectively, better than the TSX and FBE. Only the FBU did better, and that was entirely due to foreign currency.
What constitutes a good buyback?
“It’s simply a company’s ability to buy back its stock in any given year at less than the midpoint between the high for a 12-month period and the low. For example, if a company’s stock traded in 2015 at a high of $100 on October 31 and a low of $50 on July 2, and the average price it paid during 2015 was less than $75, it did it the right way,” I wrote last September. “If it paid an average of $80, it did it the wrong way.”
In addition to buying at good prices, a company that’s good at buybacks has got to make a dent in its share count. If you’re not reducing the shares outstanding year over year by at least 4%, you’re just not in the game.
Being a glutton for punishment, I’m going to try to do it again. Here are my two buyback stocks to buy heading into 2018.
Magna International Inc. (TSX:MG)(NYSE:MGA) did a reasonably good job in fiscal 2016 of buying back its stock. The company repurchased 22.6 million shares (5.6% of the shares outstanding) at an average price of US$40.40 per share. The midpoint of its high and low in 2016 was $39.85, and even though it’s best if a company’s buying below the midpoint, most buy at or near the 52-week high.
With Magna’s business as strong as it’s ever been, this is one of my two picks from the buyback list.
The other buyback stock to buy heading into 2018 is Metro, Inc. (TSX:MRU). It’s acquiring Jean Coutu Group to bring the grocery and drug store chains under one roof to create an excellent competition between itself and Loblaw Companies Ltd.
During Metro’s fiscal 2016, which ended September 24, 2016, it repurchased 9.8 million of its shares at an average price of $38.26 — $3.67 below its 52-week midpoint, reducing its share count by 4% in the process.
That’s how you do a buyback, and I expect it will pay dividends in 2018.
