Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / How Stock Buybacks Reveal Corporate Discipline in 2026
Transcript
- Lucas: The S&P 500 closed yesterday at 7,501, and one of the quietest but most powerful forces behind that level is the record wave of stock buybacks we're seeing in 2026. Luna: Buybacks always get a bad rap in the press — 'companies are just juicing EPS' — but I think there's more nuance there. Lucas: There's a ton of nuance. And actually, I'd argue that buybacks have become the single best litmus test for corporate discipline in this cycle. Not all buybacks are created equal, and the market is starting to differentiate. Luna: So what separates a good buyback from a bad one? Give me a framework. Lucas: I look at three things. First, is the company buying back stock above or below its intrinsic value? Second, what's the debt situation — are they borrowing to fund the buyback? And third, is insider selling accelerating alongside the repurchase? If insiders are dumping shares while the company buys, that's a huge red flag. Luna: Let's apply that to a real example. Apple is probably the poster child for buybacks — they've been buying back massive amounts for years. Lucas: Apple is the gold standard. They're on pace to buy back roughly $110 billion worth of stock this year alone. That's enormous. But their debt is manageable, their free cash flow is enormous, and Tim Cook and other insiders aren't selling in any meaningful way. They're using excess cash flow, not leverage. Luna: And the stock has gone from about $150 in 2020 to nearly $300 today. So the timing has been pretty good. Lucas: Exactly. But contrast that with a company like Tesla. Tesla has bought back stock at various points, but the timing has been questionable. They bought back shares when the stock was near all-time highs, and insiders — including Elon Musk — have been consistent sellers. That's a classic red flag combination. Luna: So you're saying buybacks can actually destroy value if done poorly. Lucas: Absolutely. In fact, research from McKinsey shows that companies that buy back stock at inflated prices destroy more value than they create over a 10-year horizon. It's basically the opposite of the value discipline that made them successful in the first place. Luna: Let's talk about the energy sector. ExxonMobil and Chevron have been buying back stock for years, but they've also been increasing dividends. How do they fit into your framework? Lucas: Energy is an interesting case. Exxon and Chevron have high free cash flow generation right now because oil prices have been elevated. Their buyback programs are large, but they're also paying down debt and raising dividends. The key metric I look at is the payout ratio — the percentage of earnings going to buybacks and dividends combined. Luna: And what's a healthy number? Lucas: I like to see total payout ratios — buybacks plus dividends — below 75% of free cash flow. Above that, and you're risking the dividend if earnings drop. Exxon is around 60% right now, which is disciplined. But some smaller energy companies are pushing 90%, which is dangerous given how cyclical the industry is. Luna: I think so. Look at what happened to a stock like Intel in recent years. They were buying back aggressively while also taking on debt to fund capital expenditures. Then earnings fell, and they had to cut the dividend. The stock got crushed. That's the opposite of discipline. Lucas: You mentioned earlier that the S&P 500 is at 7,501. How much of that is buyback-driven? Lucas: It's a meaningful contributor. In 2025, S&P 500 companies bought back over $1.2 trillion in stock. This year is on track to exceed that. When you have that much demand for your own shares, it creates a natural floor under the market. But it also means that when buybacks slow down — say, during a recession — the market could be more vulnerable. Luna: So as an individual stock picker, how should I use buyback data? Lucas: I'd start by screening for companies that are buying back stock but also growing revenue and earnings organically. Then check the debt level — if long-term debt is rising faster than the buyback, that's a warning. And finally, look at insider transactions. If you see a pattern of insider selling while the company is buying, that's a strong signal to be cautious. Lucas: And there's a more fundamental point here. A buyback is only as good as the management team behind it. If the CEO is incentivized to hit EPS targets regardless of valuation, you're going to get bad buybacks. That's why I pay attention to compensation structures. Luna: Speaking of compensation, if our conversations about stock picking and corporate strategy have helped you think about investing differently, a couple of dollars a month is genuinely what keeps these shows going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, it really does make a difference. No pressure, but listener support is what keeps us ad-free and focused on the analysis. Luna: So going back to the framework — you mentioned valuation is key. How do you estimate intrinsic value when looking at a buyback? Lucas: I use a simple discounted cash flow model, but for a quick proxy, I look at the price to earnings ratio relative to the company's 5-year average. If the P/E is below the average and the company is buying back, that's usually a good sign. If the P/E is above the average and they're still aggressive, that's suspicious. Luna: Give me a current example where you think the buyback is well-timed. Lucas: I think Alphabet, Google's parent company, is doing it right. They have a massive cash hoard, their P/E is around 25, which is below their 5-year average of 30, and they're buying back about $70 billion annually. Insiders aren't selling aggressively. That's a disciplined approach. Luna: And a bad example today? Lucas: I'd point to a company like Boeing. They've been buying back stock intermittently, but their debt is enormous after the 737 MAX crisis, and they're not generating consistent free cash flow. Any buyback there feels like financial engineering rather than value creation. Luna: So the bottom line: buybacks aren't inherently good or bad. It's all about context. Lucas: Exactly. They're a tool. Used wisely, they signal management confidence and return capital efficiently. Used poorly, they destroy value and mask underlying weakness. As stock pickers, our job is to tell the difference. Luna: And with the market at these levels, I think that discipline is going to matter more than ever. Lucas: Agreed. Next episode, I want to dig into the Fed's latest move and how it's affecting buyback activity. But for now, that's our take.