Buybacks Over Dividends? These 2 Stock Picks Make a Strong Case

Key Points

• Bank of America and Dollar Tree are buying back stock to send a message to retail investors: the future holds additional upside potential.
• Wall Street analysts agree with this view, as they boost valuations and EPS forecasts ahead for these names. 
• Institutions are buying ahead of these buybacks being priced in by the market, though there is still time.

There are typically two ways for investors to see the benefits of stock investing. One of them (and the most common) is buying low and selling high for a profit. However, there comes a time when investors find that one company they never want to let go of, no matter how much of a run higher they’ve already experienced, and that is where the second method comes into the equation.

That is, dividend payouts, though attractive to some, seem to be a much better option for a company's growth and compounding value. Not to mention that dividends aren’t the most efficient method of rewarding shareholders.

A much better way to see the benefits of owning a company is through stock buybacks, and the reasons for their superior efficiency will become clear soon.

Before those are laid out, investors should note that two companies have recently announced stock buyback programs, which could lead to further upside potential and other important insights.

These names are Bank of America Corp. NYSE: BAC and Dollar Tree Inc. NASDAQ: DLTR to spread a bet around the financial sector as well as the retail sector.

Why Buybacks Beat Dividends Every Time

When investors receive a dividend, they are then obligated to pay a tax on that income, and this is where the inefficiency starts to show up. Dividends are paid through company profits, which have already been taxed at that business’s corporate tax bracket, therefore creating a twice-taxed event.

More than that, this capital is essentially leaving the company, taking away its ability to reinvest in itself and spur a new growth wave through acquisitions or paying down debts to increase net income margins. Stock buybacks are often the more advantageous and less discussed way to reward shareholders, mainly because they are not taxed. They directly increase each shareholder’s ownership in the company, whose pie is shrinking with larger pieces for everyone, not to mention these also act as tailwinds for valuations and earnings per share (EPS) growth.

That being said, here is what a new stock buyback program may imply for the future of Bank of America and Dollar Tree.

A New Buying Spree for Bank of America

After approving a new stock buyback program to buy $40 billion worth of Bank of America stock, insiders are telling retail investors that the bank's future is brighter still, even after a rally of 11.5% over the past quarter, sending the stock to 93% of its 52-week highs.

The bank’s management wasn’t the only player in town looking to be exposed to this further upside potential. Institutional buyers from Cooke & Bieler decided to double their holdings in Bank of America stock, bringing their entire position to a high of $151.5 million today, roughly 15% of the $1.1 billion of institutional buying this quarter so far.

As expectations for a future interest rate cut rise, it can be assumed that a commercial bank like Bank of America will benefit from the demand that comes through mortgages and credit cards, among other such products, boosting earnings in the process.

Here's what’s interesting about this bank: even if the Federal Reserve takes longer to lower interest rates, deposits—which are high at commercial banks—can be further monetized through increased net interest income (NII). This might be why management is aiming to build on this momentum, along with institutional buyers.

Even Wall Street analysts are aware of this path higher, as they now forecast $1.06 in EPS for the second quarter of 2026, a decent rise of 19% from today’s reported $0.89 in EPS, giving investors a new fundamental reason to consider this stock.

Tariff Fears Fade for Dollar Tree

As trade tariff negotiations between the United States and most other countries advance, it appears that smaller players in the retail sector are finding new reasons to catch their breath and start a rally to catch up with the rest of the S&P 500 index.

Dollar Tree is one of these names, rising by 38% over the quarter to show investors just how much positive momentum is in this new macro theme. For the same reasons, centered around a confident future, management laid out a stock buyback program of $2.5 billion to reward those willing to stick around until the volatility fades.

Although the consensus recommendation is to Hold and the target price of $97.7 per share suggests a 15.5% decline from current levels, a few Wall Street analysts have taken a more realistic stance.

Matthew Boss and Seth Sigman from J.P. Morgan Chase and Barclays see Dollar Tree stock as an Overweight valued at $138 per share.

This contrasting view gives investors the chance to tag along with management for an implied additional upside of 20% from today’s already bullish price action.