3 Strong Companies Investing in Themselves - Investment Ideas

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It's no secret that corporations are sitting on huge piles of cash these days. In fact, by the latest count non-financial US companies have over $2 trillion in cash and other liquid assets on their books.

It's understandable that companies are still a little gun-shy in deploying that cash after the Great Recession. But with money market funds and Treasury bills paying paltry returns for the foreseeable future, businesses need to find other places to put all that dough to work.

Ideally, a company should use its capital to maximize long-term value for their shareholders. But unfortunately some managers understand this better than others. Many corporate executives are more concerned about empire-building than producing high returns on capital and often make reckless decisions with shareholders' money.

Decisions, Decisions

There are plenty of uses for a company's excess cash to try and generate strong returns for shareholders. They could plow it back into the business to fund growth, acquire other companies, or distribute it to shareholders through dividends.

Or the company could invest in itself; that is, buy back shares .

Investing in Themselves

When a company announces a stock buyback, it's a powerful signal to investors that management is confident in the long-term outlook of the company and that the share price is fundamentally undervalued.

And when the company actually buys back its shares, it has a direct benefit in that it reduces the number of shares outstanding. This means that earnings are divided among fewer shares. In other words, your piece of the pie just got bigger.

Use Caution

Stock buybacks don't always add value, however. If a company commences a share repurchase and shares go down in value, clearly it's not a good use of shareholders' cash. The money would have been better allocated elsewhere to generate returns for shareholders.

So make sure you look at the underlying business before investing in a company, because all the buybacks in the world won't save a company headed off a cliff.

3 Financially Solid Companies Buying Back Stock

I've highlighted 3 companies below who have been buying back significant amounts of their shares outstanding. And because each one has a strong cash balance and no long-term debt, they're well-positioned to continue buying back stock in the future:

Bed Bath & Beyond ( BBBY )

Cash & Securities to Total Assets: 26%
Long-term Debt to Total Assets: 0%

Bed Bath & Beyond is a home furnishings retailer with over 1,000 stores in the United States and Canada.

Since December 2004, Bed Bath & Beyond has spent $3.7 billion buying back its stock, including $859 million through the first 9 months of 2011. And total shares outstanding has decreased by 13% since 2007. That's one way to grow EPS.

Insperity ( NSP )

Cash & Securities to Total Assets: 42%
Long-term Debt to Total Assets: 0%

Insperity is a leading Professional Employment Organization ( PEO ) that provides a wide array of Human Resource solutions to small and mid sized firms.

The company's sizeable cash position and zero debt has allowed it to buy back shares of its common stock. In the third quarter of 2011 alone, the company bought back over 668,000 shares of stock (~3% of shares outstanding). As of September 30, 2011, it was authorized to repurchase an additional 1,352,089 shares under its share repurchase program.

Accenture plc ( ACN )

Cash & Securities to Total Assets: 33%
Long-term Debt to Total Assets: 0%

Accenture provides consulting and technology services to clients around the globe. With very little fixed assets and capital expenditure requirements, the company is able to return a substantial portion of its cash flow to shareholders through stock buybacks and dividends.

On top of paying a dividend that yields 2.4%, the company has been aggressively buying back its shares outstanding. From fiscal 2007 through fiscal 2011, the company generated $13.6 billion in free cash flow. It spent a whopping $12.5 billion of that buying back its stock.

And in its latest 10-Q, the company stated that it "intend[s] to continue to use a significant portion of cash generated from operations for share repurchases during the remainder of fiscal 2012."

The Bottom Line

With the economy improving and cash representing the highest percentage of total assets since 1959, it's time companies start putting that money to good use to generate decent returns for shareholders. One way is to invest in itself and buy back its shares.

That is, of course, if the company is worth investing in.

Todd Bunton is the Growth & Income Stock Strategist for Zacks.com and Co-Editor with Steve Reitmeister of the Reitmeister Value Investor that snaps up discounted value stocks and sells them after the market realizes their true worth for long-term gains.


 
ACCENTURE PLC ( ACN ): Free Stock Analysis Report
 
BED BATH&BEYOND ( BBBY ): Free Stock Analysis Report
 
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Stocks

Referenced Stocks: ACN , BBBY , PEO

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