If every year brings a fresh theme for investors, then 2011 will
surely go down as the year cash-rich companies spent a lot more
money buying back their own stock.
In past periods of slow economic growth, companies deployed their
cash to make deals in order to boost sales and profits. Yet
(M&A) activity has been surprisingly tepid this year, even in
the context of more than $2 trillion in cash parked on S&P 500
balance sheets. Sure, there have been a few big M&A deals --
most notably in the energy sector -- but it's clear that stock
buybacks have been the preferred route to earnings-per-share (
) growth for many companies.
I've been periodically describing intriguing big buyback plans from
at the tail end of eachearnings season (companies typically pair
buyback announcements withearnings releases). So with the
winding down, it's time for a fresh look at this theme.
A frenzy of stock buybacks
Since the beginning of October, nearly 12 companies have announced
new or updated buyback plans that are set to shrink their share
count by at least 10%. As a result, each one of these companies
should be able to boost EPS by a commensurate
To make the list, I focused on stocks that trade for less than 13
times projected 2012 profits, which is the mid-point multiple of
the S&P 500. Here's what I found...
1. WellPoint Inc. (NYSE:
industry is surely in transition. A major reform of the U.S. health
care system is set to create new mandates regarding the acceptance
of all patients, coverage of more basic preventative services and
the limit the amount of insurance premiums that can be earmarked
. This uncertainty may explain why
of WellPoint, one of the nation's largest managed-care companies,
trade below levels seen back in 2007. After all, the changing
health care environment has already led
free cash flow
to fall from $4 billion in 2007 to just $1 billion in 2010.
Yet WellPoint's management contends that the company's
picture can actually brighten -- despite the regulatory challenges
-- through better cost controls. The company is backing up this
sentiment with a hefty $5 billion stock buyback that could shrink
the share count by 20%.
Analysts at Merrill Lynch agree with the company's move. "Health
care reform will not be as onerous as many expect and that
confirmation of this will lift the group." In fact, WellPoint is
their top pick in the group, as they predict the company's EPS can
rise from about $7 this year to roughly $9 by 2013. Roughly $0.60
of this gain is expected to come from the share buyback, but
analysts suggest the boost may be even stronger because WellPoint
may buy back $2.5 billion to $3.5 billion in stock in 2012, higher
than the $1.6 billion Merrill Lynch currently anticipates the
company is buying back.
2. Viacom Inc. (NYSE:
Business is booming for this firm, which owns Paramount Pictures,
MTV Networks, Nickelodeon, Comedy Central and other well-known
cable networks. Fiscal fourth-quarter sales rose 22% year-over-year
to $4.05 billion, pushing
up 27% to $1.06 billion. This is such a steady business, poised to
flourish in almost any economic climate, that management has
expressed a willingness to borrow money if needed to fuel its
stunningly large $10 billion share buyback program (of which $3
billion has already been completed).
Analysts at Needham have crunched the numbers and figure the
buyback will drop Viacom's share count from 610 million at the end
of 2010 to 552 million by the end of 2012. They also say Viacom's
operating income will expand at a 4.8% annual pace through the next
decade. By this math, and using a target price-to-earnings (P/E)
ratio of nine on projected 2012 profits and the shrinking share
count, they figure shares are worth $63 -- 40% above current
3. Amgen Inc. (Nasdaq:
Major drug companies often seek out acquisitions to inspire growth.
Yet this firm has always sought to focus its efforts on internal
drug development. As
I noted back in August
, Amgen is one of the few companies that spends more than 20% of
its revenue on research and development (R&D) efforts.
Yet even with this level of spending -- which will ostensibly help
boost EPS as new drugs under development hit the
-- Amgen is taking another EPS-friendly move by buying back a heady
$10 billion in stock that could eventually shrink the share count
To be sure, it's the drug pipeline that will really determine the
future direction of this stock. The pipeline is rapidly maturing as
key drugs move closer to Food and Drug Administration (FDA)
approval. These drugs include:
- T-Vex, a live-virus cancer vaccine that yielded a 28%
response rate in Phase II studies.
- AMG 386, a Phase III drug that targets ovarian cancer.
- AMG 785, a Phase II drug targeting Osteoporosis.
- AMG 827, a Phase III drug treating rheumatoid arthritis.
While Amgen waits to see which of these drugs will get FDA
approval, the company can still depend on valuable existing drugs
such as Epogen (which treats dialysis-related anemia), Aranesp
(renal-based anemia), Neupogen (low white blood cells) and Enbrel
(inflammation). Altogether, the portfolio of drugs accounts for
roughly $15-16 billion in annual sales and EPS between $5 and $6.
The new drug pipeline should help maintain or even boost these
figures if the company can successfully meet the FDA's approval
"The long-term value of the pipeline is overlooked," note analysts
at Citigroup, figuring shares could trade up from a current $57 to
$65. Notably, their profit forecasts don't appear to reflect the
effects of the big share buyback, so actual EPS -- and their
-- could be due for an upgrade when the buyback takes place.
Risks to Consider:
Employee stock-option grants could offset some of the benefits
of a stock buyback, so it pays to monitor the shrinking share count
if you look to buy these stocks.
Action to Take -->
Stock buybacks can be a better alternative than dividends, because
they don't trigger capital gains. That's why some investors keep
stocks in their tax-free retirement accounts while maintaining
these capital-appreciation plays in their nontax-advantaged
portfolios. There's no
buybacks will boost a stock price, but all other things being
equal, they should have a certifiably positive impact on EPS, which
should provide support.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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