Whenever investors think about the potential growth potential of the stock market, they typically use the classic “buy low and sell high” methodology, which brings a capital gains aspect to successful investing. The second most common way investors consider a stock’s growth potential is through dividend payments, which are attractive when the investment is large enough to offset the tax inefficiency associated with dividend income.
Dividends are paid out of the company’s free cash flow, which is then taxed at the appropriate corporate level. When investors receive these distributions, they are taxed again based on their personal performance. This double taxation makes dividend income ineffective. It also robs the company of capital and its ability to reinvest in growth and capital opportunities.
A third route that investors don’t take very often is when companies start buying back their own shares. This method keeps capital within the business, reinvests it and takes advantage of compounding, and eliminates the second aspect of taxation that comes with dividends. Management believes three stocks are cheap enough to buy today: Mastercard Inc. New York Stock Exchange: Massachusetts, Kroger Company New York Stock Exchange: KRand even Archer-Daniels-Midland Co. New York Stock Exchange: ADM.
What’s behind the Mastercard share buyback?
Mastercard today
Mastercard
(As of December 31, 2024 at 5:45 pm ET)
- 52 week range
- $416.53
▼
$537.70
- Dividend yield
- 0.58%
- P/E ratio
- 39.83
- Target price
- $562.76
Now that the global economy is moving towards a more digital structure and consumerism has taken on a new dimension, stocks in the payment platform arena are likely to do well in the coming years, if not decades. That’s why, of all the players in the financial sector, Mastercard recently decided to start buying back shares.
As of December 2024, Mastercard’s board of directors decided to approve up to $12 billion in share repurchase funds. This can be seen as a sign that the stock is quite cheap today and is expected to rise in the coming months.
Moreover, this $12 billion will be reinvested back into the business, which currently generates up to 55% return on invested capital (ROIC). This article does a better job of explaining the importance of ROIC in building wealth through stock investing, but for now all investors need to know is that the buyback amount gives Mastercard a new path to higher prices.
Wall Street analysts agree with this view, especially analysts at Morgan Stanley. They confirmed that Mastercard shares have an overweight rating and now believe their fair valuation will be closer to $654 per share as of December 2024. To prove this upgrade is right, Mastercard would have to rise as much as 23% from where it trades today.
Management Commitment Draws Institutional Buyers to Kroger Shares
Kroger today
(As of December 31, 2024 at 5:45 pm ET)
- 52 week range
- $44.48
▼
$63.59
- Dividend yield
- 2.09%
- P/E ratio
- 16.18
- Target price
- $65.79
With the approval of a share repurchase program worth up to $7.5 billion through December 2024, representing up to 16.6% of the company’s market capitalization, institutional investors saw this commitment to Kroger stock as validation of their own purchases.
State Street led the recent buying activity, increasing its holdings by 6.8% of its net position to a high of $1.9 billion to date, or 4.5% ownership in the company. This confidence and commitment to Kroger stock didn’t stop at the shopper level; others on Wall Street were also willing to make their views public.
Analysts at Bank of America recently maintained a Buy rating on Kroger shares, this time along with a $75 share price target, up from the previous estimate of $70. This new target would mean Kroger could generate growth of up to 20.4% from where it trades today.
Moreover, this new $7.5 billion buyback will be directly tied to the company’s 14% return on investment as of the trailing 12 months, which is a higher return on that capital than most investors would have received by simply buying the S&P Index 500 and its average return of 6-8% per annum.
New Upside Expected for Archer-Daniels Shares
Archer-Daniels-Midland today
Archer-Daniels-Midland
(As of 12/31/2024 5:32 PM ET)
- 52 week range
- $48.92
▼
$74.02
- Dividend yield
- 3.96%
- P/E ratio
- 14.43
- Target price
- $60.62
Most food and drink companies today are seeing their profits shrink due to supply constraints in Eastern Europe caused by conflicts between Russia and Ukraine. However, once these conflicts are resolved, supply chains and costs will normalize, returning stocks like Archer-Daniels to their previous levels of profitability.
That’s why management was willing to buy back up to 100 million shares under its new program, or roughly $5 billion at today’s share price. Moreover, Wall Street analyst Snow forecasts the company’s earnings per share (EPS) of $1.33 over the next 12 months, which would be a significant jump of 30% from today’s level of $1.03.
Given this EPS growth forecast, it would be reasonable to see analysts also reach a consensus price target of up to $60 per share today, implying net upside of around 20% from the current share price. It would make sense for management and analysts to be so bullish on the stock, especially now that it’s trading at just 68% of its 52-week high.
Before you consider Kroger, you might want to hear this.
MarketBeat tracks Wall Street’s top-rated and best-performing analysts daily and the stocks they recommend to their clients. MarketBeat identified five stocks that top analysts were quietly telling their clients to buy now, before the broader market caught on… and Kroger wasn’t on the list.
While Kroger currently has a Moderate Buy rating among analysts, the top-rated analysts consider these five stocks to be Strong Buys.
View five stocks here
Click the link below and we’ll send you MarketBeat’s list of the 10 best stocks to own in 2025 and explain why they should be in your portfolio.
Get this free report