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Warren Buffett Earned 50x His Money With Just One 10B-18 Trade
Everyone thinks of the Oracle of Omaha as the ultimate value investor. And he is. But what they may not realize is he built his $116 billion fortune on the back of “tax free dividends.”
Take GEICO. It’s one of Berkshire Hathaway’s most valuable holdings.
Buffett started buying shares in 1976. All told, by 1980 he’d invested $46 million.
Over the next 16 years, he leveraged GEICO’s 10B-18 distributions to grow his position. By 1996, he owned a controlling 51% stake in the company.
By then, his shares were worth $2.3 billion.
That’s a 50 fold return on his initial investments.
Today, GEICO is estimated to be worth between $30-50 billion.
Now he rarely makes an investment unless he knows he’s eligible to collect tax free “10B-18 dividends” on it.
What The Heck Is Rule 10B-18? And Why Is It So Good For Investors?
Legalized stock buybacks…
That’s when a company goes into the market and buys its own stock, reducing the number of shares outstanding.
Investors like Warren Buffett, Paul Singer, Carl Icahn and Bill Ackman love them for several reasons:
- With fewer shares floating around, any investors who hold onto their stock wind up owning more of the company. Sometimes MUCH more.
That’s how Buffett’s Berkshire Hathaway went from a 30% stake in GEICO in 1980 to a 51% stake by 1996 without spending another dollar.
- When a company begins a buyback campaign, they’re tilting the supply and demand for their own stock temporarily.
Suddenly you have a buyer in the market.
When Chevron announced their $75 billion buyback last year, that represented 21.7% of their market cap at the time.
And they can’t just buy it all at once…
10B-18 states they can only legally buy 25% of their average daily volume per day.
Chevron trades 7,570,901 shares per day, or $1.2 billion in daily volume. That means they have a buyback cap of $300 million every session.
They could be in the market for 250 trading days to hit their target.
That’s a full trading year of market support.
If you want to know why the SEC used to prosecute stock buybacks as “market manipulation” - that’s why. It can be GREAT for floating up stock prices.
- If you don’t sell into the buyback, you have ZERO tax liability.
When a company issues a dividend, that’s taxable income.
But with a buyback? You only owe the IRS if you sell your position and have a capital gain. If you hold and the stock goes up…
You’ve increased your net worth totally tax free.
And, as we’ve seen — those gains can be truly substantial.
If you pick the RIGHT buyback stocks…
Not All Buybacks Are Created Equal
10B-18 transactions don’t deliver guaranteed returns.
You can’t just buy any stock that announces a buyback and expect to make money. If you don’t know what you’re doing, you’re in for a world of hurt.
Some buybacks are done for the right reasons.
You have a company with solid cash flows and a solid balance sheet. Management is buying stock at a discount to its true value.
That’s what Warren Buffett calls “value-accretive prices.”
I love those deals.
Other buybacks don’t do that.
They’re little more than a “hail mary” play to defend the stock.
If you want to avoid that fatal mistake, and if you want to make the most of this opportunity over the next 24 months…
There Are Three Rules You Must Follow To Cash In On “Tax-free Dividends”
If you get all three, you have a trade. If not, steer clear.
- Only target major transactions.
It’s okay if the company isn’t spending billions. But they need to buy at least 7% of their market cap. That tells you it’s a serious, market moving event.
Anything less isn’t worth your time.
- Only target companies with huge growth potential.
Lots of companies buy back stock.
But at the end of the day… you’re buying businesses.
And these businesses need to have big growth catalysts that will fuel strong earnings growth at least over the next two years.
Strong earnings growth almost always leads to higher stock prices.
It also leads to tons of free cash flow…
Which can be used to further grow their business through acquisitions, hiring top tier employees, and investing in new technologies like Artificial Intelligence.
Without growth, most companies become value traps where buying back stock is just a temporary fix NOT a long-term momentum driver.
- Companies actually follow through on their buybacks…
Buyback announcements are common.
If you are Apple or Google and announce a buyback, chances are you will read about it the next day in the Wall Street Journal.
What you don’t hear…
Buybacks are not commitments, they’re optional.
In other words, companies are allowed to announce big buybacks, but are not required to follow through on them.
How Do You Know Which Companies To Buy?
It’s not easy to find companies who check all three of these boxes.
And this is where Curzio Research can help…
We lean on Frank’s decades of experience in the industry.
We have access to software that alerts us to all new buybacks.
We’re not just talking about the major tech companies whose buyback announcements get mentioned in numerous media outlets.
And we don’t just get alerted when a buyback kicks off.
We also have access to Wall Street’s top institutions who provide research and projections for public companies.
When CNBC or Fox Business report on how Cisco or Intel’s quarterly numbers beat “analysts’ estimates” - these are the analysts they’re talking about.
So we can predict the growth potential of these companies.
We can find the ones with serious cash flow potential.
The ones with a long history of delivering value for investors.
And then we publish those findings in the Curzio Research Advisory.
We’ve identified our next buyback target.
You can read about it in our latest special report…
Our #1 Buyback Stock To Own Immediately
When you try a risk-free trial of Curzio Research Advisory today.
Editor
Market veteran and founder of Curzio Research, Frank is one of America’s most respected securities experts. His top-ranked Wall Street Unplugged podcast has been downloaded over 11 million times. Learn more
Analyst
Curzio analyst and co-host of Wall Street Unplugged, Daniel has over a decade of experience researching macro trends, large- and small-cap stocks, and digital securities. Learn more
Frank consistently recommends winning ideas
Investing in securities involves the risk of loss. Past performance is used as an example and does not guarantee future results.
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Members Only Special Reports
3 popular dividend stocks to avoid (or sell right now!)
With higher rates here to stay, investors can now get risk-free income from Treasurys… which means companies can no longer use high dividends as a “sweetener” to entice investors. Meanwhile, high-dividend-paying companies that aren’t growing sales and earnings will likely see their stocks underperform the rest of the market. Here are three dividend stocks to avoid…
Buyback watchlist: 25 stocks with huge upside potential
Stock buybacks are great for investors. They allow existing shareholders to claim a bigger share of a company’s profits… And they create a major tailwind that helps “buyback stocks” outperform the S&P 500. But we don’t want to buy every company announcing a major stock buyback. In this special report, we’ve compiled a list of companies that are buying back at least 6% of their float. (We’ll update this list every three months.)
The simple strategy that beats the market: How to get started
A buyback-focused approach is one of the few proven strategies for beating the market. It’s something most mom-and-pop investors have never heard of… but I want to change that. In this special report, I’ll explain how buybacks work… why they’ll continue to work for investors… and the first stock I want you to buy to take advantage of this strategy.
...and many more.
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