Across the country, many corporate boards are faced with the
same conundrum: Cash is piling up quite fast, but clear uses of
that cash are lacking. Few companies want to make major
acquisitions in these still-uncertain times, and though dividend
hikes are a logical option, they still don't have a meaningful
effect on cash balances.
That's why you still hear about many companies issuing seemingly
robust stock buyback programs.
Though the number of buyback announcements (and the dollar value
of them) slipped about 10-12% in 2012 compared with the record year
of 2011, they still remain near peak levels.
And January 2013 has brought more of the same. In the past four
weeks, these four companies announced plans to initiate or extend
stock buyback programs worth almost $10 billion on a collective
Frankly, they shouldn't bother. The size of the buybacks won't
make a meaningful dent in the share count, these stocks already
trade near multi-year highs. Besides, they don't look like bargains
in the context of price-to-earnings ratios.
The only buyback announcements worthy of further research
involve companies buying back huge amounts of stock, or at least a
stock that is clearly cheap.
In this context, eight companies are buying back stocks that are
surely worth further research. Each one of them has the potential
to reduce the share count by at least 10%. They may not all appear
undervalued in the context of price-to-earnings (P/E) ratios, but
their earnings per share (
) will surely rise in coming years (and the P/E ratio will surely
shrink) if they aggressively reduce the share count.
I'll skip any discussion about
in this article. Enough ink has already been spilled on this
controversial company elsewhere (but you can also read my colleague
Michael Vodicka's take on the stock TUP),
A smoother global economy changes the risk profile for
Although North American growth remains quite modest for
Tupperware, the company is booming in other markets. Sales in
Brazil, India, Indonesia, Malaysia and Singapore rose in excess of
25% in the fourth quarter of 2012. (Sales in Russia and Eastern
Europe also rose at a double-digit pace). We've written extensively
about how fast-rising middle classes in emerging economies will
fuel sales for U.S. multinationals, and Tupperware is proof
positive, as emerging markets now account for 60% of sales.
Tupperware's management is so confident the company's current
base of sales and profits can be maintained, that it is raising the
maximum target level of debt it will carry on its balance sheet.
And by expanding the use of leverage, this company plans to sharply
hike its dividend (by a hefty 72%) and buy back up to $2 billion in
stock. That's almost half of the entire market value of the
Tupperware already managed to shrink its share count from 61.4
million in 2011 to 56.4 million in 2012, and as the share count
continues to go down, a company boosting sales at a single-digit
pace can keep boosting EPS at a double-digit pace.
Auto parts supplier Lear is also taking up its debt load to
bring in more cash for heightened buybacks. The company recently
announced plans to boost the current share buyback from $800
million to $1.5 billion. Lear's share count has already fallen from
156 million in 2007 to under 100 million as of September, 2012, and
the current share buyback should push the figure down to 95
Cost cuts fuel buybacks
has been streamlining its operations for several years and is now
in a position to reward shareholders. The company generated $37
million in free cash flow in fiscal (June) 2012, which is greater
than the prior seven years' free cash flow -- combined. And that
sets the stage for a $50 million share buyback. That should shrink
the current 20-million share count to below 17 million.
All other things being equal, per share profits should rise by
at least 15%, or whatever percentage the share count ultimately
shrinks. In fact, per share profits are expected to rise more than
15% in fiscal (June) 2014, to around $2.30. That's no coincidence.
As long as shares continue to trade at just six times forward
profits (and below tangible book value), a stock buyback makes
Risks to Consider:
These buybacks may continue even if shares rise sharply from
here, making the buyback plans less salutary.
Action to Take -->
So many buyback plans are a mistake, as they are done simply
because no other use of cash exists. Yet Tupperware, Lear and Unifi
provide examples of a buyback plan that can materially boost EPS.
In the event that the broader market falls and these stocks slump
in tandem, then the buyback plans will prove to be of even greater