A New Twist on the Dogs of the Dow

03/27/2008 12:00 am EST


David Fried

Editor, The Buyback Letter

David Fried, editor of David Fried’s Buyback Letter, has a new wrinkle on the Dogs of the Dow strategy, focusing on companies that buy back their own stock.

The Dogs of the Dow are the ten stocks with the highest dividend yields in the 30-stock Dow Jones Industrial Average. Investing in these Dogs is a contrarian strategy based on selecting the ten most out-of-favor Dow stocks. You simply buy and hold those ten canines for a year and then select the ten new mutts when the new year rolls around.

Our five-stock Buyback Dogs portfolio adds another important factor–in addition to a high dividend yield and a low price relative to the market, we look for Dogs that are also buying back substantial amounts of their own stock.

Since inception (March 5, 1997), our Buyback Dogs were up 239.48%, vs. only 82.12% for the DJIA, or only 71.95% for the Standard & Poor’s 500.

In our Buyback Dogs Portfolio, we currently hold these five stocks:

Home Depot (NYSE: HD) is the world’s largest home improvement retailer, with 2,243 retail stores in [the US, Canada,] Mexico and China. In fiscal 2007, it had sales of $77.3 billion and earnings from continuing operations of $4.2 billion.  Despite woes in the housing market, HD is managing its inventory well, cutting back on new store openings and investing in staff recruitment and store upgrades. It is also a robust repurchaser of its own stock. In the last 12 months, management has reduced shares outstanding by 17.3%.

Boeing (NYSE: BA) is the world's leading aerospace company and the largest manufacturer of commercial jetliners and military aircraft combined. Boeing has customers in more than 90 countries and is one of the largest US exporters. Boeing reported record revenues, earnings, and cash flow for 2007, [and] 2008 [earnings per share] guidance was raised. In the last 12 months, management has reduced shares outstanding by 3.3%.

Hewlett-Packard (NYSE: HPQ) is among the world’s largest information technology (IT) companies, with revenue totaling $107.7 billion for the four quarters ended January 31, and serving more than a billion customers in more than 170 countries, with some 172,000 employees worldwide. HP [makes] inkjet, all-in-one and laser printers, scanners, ink and laser supplies, Windows®, Linux, UNIX and high-end UNIX servers, storage systems, and desktop and notebook PCs. In the last 12 months, management has reduced shares outstanding by 5.4%.

International Business Machines (NYSE: IBM), with a market capitalization of about $158 billion, is the world's largest IT company. Now IBM is grabbing headlines with a $15-billion repurchase. IBM expects to spend $12 billion of that authorization this year. The buybacks are predicted to lift 2008 profit by up to five cents a share, so IBM raised its full-year EPS target to at least $8.25. Shares outstanding have declined 8.5% over the past year.

Exxon Mobil (NYSE: XOM) is the world's largest publicly traded company, operating international oil and gas facilities or marketing products in most of the world’s countries and exploring for oil and natural gas on six continents. Exxon Mobil in December boasted the highest quarterly profits ever recorded by any company—$11.66 billion, or $2.13 per share. In addition, the company replaced more reserves than it produced in 2007, a measure of the success of any exploration and production operation. In the last 12 months, management has reduced shares outstanding by 6.3%.

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