Earlier this week, the Federal Reserve's July meeting minutes revealed a growing consensus around an interest rate cut, with most officials signaling that if inflation data trends continue as expected, easing could be on the table for the next meeting. And today’s highly anticipated comments from Fed Chair Jerome Powell in Jackson Hole seemed to cement the odds for a September rate cut, which would mark the first reduction since the emergency easing during the early days of the COVID-19 pandemic.
As the Fed gears up for its pivotal rate cut, history suggests that stocks with strong buyback programs could beat the market going forward. Evercore ISI points out that companies with high buyback factors have consistently outperformed during past rate-cut cycles since 1990 "with a 100% hit rate.”
With the Fed expected to continue cutting rates into 2025, the firm suggests considering stocks that combine strong buyback programs with exposure to artificial intelligence (AI) upside. Here are their three picks.
AI Stock #1: Apple
Established in 1976, Apple Inc. (AAPL) stands out as the undisputed leader in consumer tech innovation. With a massive market cap of $3.4 trillion, this Cupertino-based technology giant continually sets new benchmarks with its iconic products, including the iPhone, iPad, Mac, AirPods, Apple Watch, and the groundbreaking Apple Vision Pro. Beyond its impressive product lineup and accompanying ecosystem of services, Apple has also entered the AI arena with its much-anticipated "Apple Intelligence."
Shares of this mega-cap stock have rallied 24.7% over the past 52 weeks and 17.4% on a YTD basis, roughly in line with the broader S&P 500 Index’s ($SPX) gain of 26.6% over the past 52 weeks and 17.7% return on a YTD basis.
On Aug. 1, Apple announced a quarterly dividend of $0.25 per share, payable to its shareholders on Aug.15. Its annualized dividend of $1.00 per share offers a 0.45% dividend yield. The tech giant’s commitment to shareholders is evidenced by its decade-long streak of increasing dividends.
In May, Apple unveiled a record-breaking $110 billion share buyback plan, marking the largest stock buyback in U.S. history. And during its fiscal Q3, Apple rewarded its shareholders with over $32 billion, including $3.9 billion in dividends and a hefty $26 billion spent on share repurchases.
Following the company’s Q3 earnings results on Aug.1, which exceeded Wall Street’s expectations, shares of Apple defied widespread selling in markets the next day to close marginally higher. Revenue increased 5% year-over-year to $85.8 billion, surpassing estimates by 1.7%, while EPS grew by 11% annually to $1.40, exceeding expectations by a 4.5% margin.
During Q3, Apple’s iPad division stole the spotlight, demonstrating an impressive sales growth of 24% year over year. On the other hand, despite a slight year-over-year dip in sales of the iPhone, it still remains Apple's top revenue driver, contributing 46% of the company's total sales for the quarter.
Although Apple doesn’t offer forward guidance, management indicated during the Q3 earnings call that they anticipate similar overall revenue growth for Q4. Plus, executives also projected operating expenses between $14.2 billion and $14.4 billion, with gross margins ranging from 45.5% to 46.5% for the ongoing quarter.
Analysts tracking Apple project the company’s profit to reach $6.70 per share in fiscal 2024, up 9.3% year over year, and grow another 12.7% to $7.55 per share in fiscal 2025.
Overall, AAPL stock has a consensus “Moderate Buy” rating. Of the 31 analysts covering the stock, 19 advise a “Strong Buy,” three say it’s a “Moderate Buy,” eight have a “Hold” rating, and one recommends a “Strong Sell.”
The average analyst price target of $241.68 indicates a potential upside of nearly 7% from the current price levels. The Street-high price target of $300 suggests that AAPL could rally as much as 32.5% from here.
AI Stock #2: Broadcom
Boasting a market cap of roughly $755.7 billion, California-based Broadcom Inc. (AVGO) is a global tech powerhouse known for its groundbreaking semiconductor, enterprise software, and security solutions. Broadcom serves vital markets such as cloud, data center, networking, broadband, wireless, storage, and industrial sectors, delivering advanced products that drive everything from mobile and broadband connectivity to mainframe systems and cybersecurity.
Shares of this chip giant have soared a remarkable 90% over the past 52 weeks and 48.8% on a YTD basis, dwarfing the broader SPX’s gains during both periods.
During Q1, Broadcom invested approximately $8.3 billion in share repurchases, underscoring its dedication to returning value to shareholders. This commitment is further highlighted by its respectable 13-year track record of consistent dividend increases and a healthy payout ratio of 53.46%. The company’s annualized dividend of $2.10 per share translates to an attractive 1.29% dividend yield.
On June 12, Broadcom unveiled a 10-for-1 stock split alongside its stronger-than-expected Q2 earnings results, leading to a notable 12.3% rise in its shares the following trading session. The company's historic first stock split took effect after the market closed on July 12.
During Q2, the chipmaker generated revenue of $12.5 billion, which topped estimates by a 4% margin and marked an impressive 43% year-over-year jump. Adjusted EPS also exceeded Wall Street’s expectations, reaching $10.96, up 6.2% annually. Plus, adjusted EBITDA for the quarter shot up almost 31% year over year to $7.4 billion.
Commenting on the Q2 performance, CEO Hock Tan said, “Broadcom’s second quarter results were once again driven by AI demand and VMware. Revenue from our AI products was a record $3.1 billion during the quarter. Infrastructure software revenue accelerated as more enterprises adopted the VMware software stack to build their own private clouds."
Supported by this strong Q2 performance, management raised its fiscal 2024 revenue and adjusted EBITDA guidance. The company now expects full-year revenue to reach approximately $51 billion, with adjusted EBITDA anticipated to be around 61% of this projected revenue. Broadcom is slated to announce its fiscal Q3 earnings results after the market closes on Thursday, Sept. 5.
Analysts tracking Broadcom expect the company’s profit to increase 31% year over year to $4.90 per share in fiscal 2025, following a projected 3% decline in EPS this fiscal year.
AVGO stock has a consensus “Strong Buy” rating overall. Of the 32 analysts in coverage, 29 suggest a “Strong Buy,” and the remaining three have a “Hold” rating.
The average analyst price target of $190.51 indicates a potential upside of 14.8% from the current price levels. The Street-high price target of $240 suggests that the stock could rally as much as 44.6%.
AI Stock #3: Vertiv Holdings
Valued at $28.7 billion by market cap, Ohio-based Vertiv Holdings Co (VRT) is at the forefront of addressing the critical challenges faced by modern data centers, communication networks, and commercial and industrial facilities. Vertiv’s expansive portfolio includes power, cooling, and IT infrastructure solutions and services, supporting operations from the cloud to the edge.
With AI systems becoming ever more complex, Vertiv’s cutting-edge liquid cooling solutions are vital for keeping AI infrastructure running smoothly and efficiently. Shares of Vertiv have rallied a stunning 120.8% over the past 52 weeks and 64% on a YTD basis, crushing the SPX’s gains during both these time frames.
Earlier this year, Vertiv ramped up its capital deployment with $600 million dedicated to share repurchases in Q1 despite the elevated prices, showcasing its strong dedication to maximizing shareholder value. And on June 26, the company paid its shareholders a quarterly dividend of $0.025 per share. Vertiv offers an annualized dividend of $0.10 per share, resulting in a dividend yield of 0.13%.
On July 24, the liquid-cooling technology company reported its Q2 earnings results, which blew past Wall Street’s expectations. The company’s net sales for the quarter soared 13% year over year to approximately $2 billion, while adjusted earnings rose 45.7% to $0.67 per share, beating estimates by a solid 13.6% margin.
Adjusted operating margin surged by 510 basis points from the year-ago quarter to 19.6%, driven by increased volumes, favorable price-cost dynamics, and improved manufacturing productivity, even as the company invested in R&D and capacity expansion.
During the quarter, liquidity stood at $1.2 billion with no borrowings under the ABL credit facility, while net leverage was a healthy 1.8x, within the management’s target range of 1.0x to 2.0x.
Discussing the Q2 performance, CEO Giordano Albertazzi said, “We continue to see increased scaling of AI deployment, and Vertiv has the capacity in place to seize this pivotal moment while continuing to invest in capacity for the future.” The CEO highlighted Vertiv’s essential role as the bridge between IT and facilities in data centers, underlining the company's unique market position.
For fiscal 2024, the company is guiding for net sales between $7.59 billion and $7.74 billion, with organic growth projected at 12% to 14%. Adjusted operating profit is expected between $1.41 billion and $1.46 billion, translating to an operating profit margin of 18.5% to 18.9%. Additionally, adjusted diluted EPS is forecast to range from $2.47 to $2.53, while adjusted free cash flow is anticipated between $850 million and $900 million.
Analysts tracking Vertiv project the company’s profit to reach $2.58 per share in fiscal 2024, up 45.8% year over year, and grow another 28.3% to $3.31 per share in fiscal 2025.
Wall Street appears highly bullish on VRT stock, with all 11 analysts in coverage unanimously rating it a “Strong Buy.”
The average analyst price target of $102.30 indicates a potential upside of 30.7% from the current price levels. The Street-high price target of $115 suggests that VRT stock could rally as much as 47%.
On the date of publication, Anushka Mukherji did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
