There are two main ways companies can reward shareholders. One way is to pay a growing dividend from rising cash flows over time. Another way is to buy back shares when the company’s valuation is compellingly low.
Some companies can do both, provided they don’t overpay to buy back shares. With many stocks down right now, a few companies are setting up for better returns when the market sentiment turns bullish again with increased buybacks.
One company making a big buyback and increasing its dividend right now is Diamondback Energy (FANG). The company has plans to buy back $2 billion in shares, and is increasing its dividend yield by 7.1 percent to 2.5 percent right now.
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Shares are up 34 percent in the past year, but have pulled back in recent sessions. Even with the rally in the past year, the oil and gas company looks attractively valued at 6 times earnings.
Action to take: The company is a solid dividend growth play, and shares will likely continue to rise thanks to the buyback plan in place. Plus, the company has a fat profit margin right now.
For traders, the December $175 calls, last going for about $5.75, can likely rally by mid-double-digits in the coming months on a continued rally in shares.
Disclosure: The author of this article has no position in the company mentioned here, but may trade after the next 72 hours. The author receives no compensation from any of the companies mentioned in this article.