When it comes to stock buybacks, we tend to assume investors
will surely benefit sooner and later. In the near-term,shares can
find support from a large institutional buyer -- i.e. the company
itself -- and in the long-term,
earnings per share (
EPS
)
should rise by the corresponding percentage the share price has
been reduced (off-setting options grants notwithstanding).
But what about the mid-term? What happens to stocks six months
after buybacks were announced? Well, it's time to look at a group
of stocks
I profiled back in February
to see how they're doing. Each of these firms committed to buy at
least $500 million in stock back, reducing their share counts by at
least 5%.
How did they do? Not well. Many of these stocks rose higher in the
spring, but thanks to the recent market rout, they have all dropped
in value since the buying began. In that time, the S&P 500 has
dropped about 16%, a
benchmark
that only five of these companies were able to exceed (although two
were among the companies I profiled back in
my February article
).
What went wrong? Either the companies were foolhardy in buying back
stock ahead of eventually worsening conditions, or they are simply
being punished by a sour investor mood that takes volatile
(high-beta) stocks even lower. If there is a silver lining, it is
that the falling prices will allow companies to buy back an even
greater percentage of their share count.
Judging by
profit
forecasts, these companies appeared to be buying at the right time.
In most instances, analysts have (sometimes sharply) boosted their
2011 and 2012 profit outlooks after digesting first and second
quarter results. Only biotech
Life Technologies (Nasdaq:
LIFE
)
and construction firm
Shaw Group (Nasdaq:
SHAW
)
have seen business start to slump recently.
Looking at this group with a fresh set of eyes, you have to draw
different conclusions than the ones drawn six months ago. It's
impressive that drug maker
AstraZeneca (NYSE:
AZN
)
, which I recommended back then, has held up well in this tough
market, thanks to the perceived consistency of its
business model
. But this is precisely the kind of stock that is going to miss out
on any eventual rally to come, because investors will first seek
out the most beaten down stocks. (Drug stocks in general failed to
participate in the powerful snapback rally of 2009.)
Assurant (NYSE:
AI
)
On the heels of early 2011 buyback plans, Assurant has already
shrunk its share count by nearly 7% this year. This provider of a
range of consumer-oriented insurance plans (i.e. life, disability,
life insurance, pre-arranged funeral services, etc.) is likely to
suspend the current buyback with the advent of the hurricane
season, with plans to resume it after the season has passed.
Profits this year have been below 2010 levels, thanks largely to
the fact the "specialty" insurance division, which works with
buyers of foreclosed homes, had a banner year in 2010 and the
business has started to wind down as the
foreclosure
debacle recedes.
Unless we get an especially aggressive -- and financially
catastrophic -- hurricane season, then Assurant looks set to
generate record results in 2012, highlighted by a 30% jump in
EPS
to $5.70, according to analysts at Sterne Agee. Much of those gains
are expected to derive from a streamlined health insurance business
that is adjusting to new government mandates. Margins in this
segment have slumped badly this year, but according to Sterne Agee,
should be much firmer in 2012.
It's one thing to note
shares
are inexpensive at just six times projected 2012 profits. Yet the
real disconnect comes on the
balance sheet
. The company is valued at around $3 billion, but tangible
book value
exceeds $4 billion (and could approach $4.5 billion by 2013). So
any stock buyback efforts are both accretive to EPS and provide
great returns from a price-to-book perspective. There's no reason
this stock can't eventually support a forward P/E multiple of 8 or
9 (equating to a stock price of $42 to $46, or right in line with
the $46 tangible book value -- which stands more than 30% above
current levels).
Risks to consider:
Washington is likely to keep tinkering with healthcare in the
next few years, and in some instances, may look to crimp the
profitability of for-profit insurers to an even greater extent.
This would impede Assurant's goals of delivering much stronger
margins and returns on equity in 2012.
Action to Take -->
It's noteworthy that most of the names in the group have seen their
EPS estimates maintained or even raised. The falling stock prices
means their P/E ratios are now even lower than back in February,
making buyback efforts all the more compelling -- as well as a
fresh look as a potential investment.
-- David Sterman
P.S. -- Especially in a volatile market, it's important to own
companies with strong fundamentals. Here's why we think these 10
stocks are poised to deliver above-average returns for years to
come.
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.