Here at StreetAuthority, we spend a great deal of time
focusing on dividend-payingstocks .
Risingdividend payments have become the hallmark of the
moderninvesting era as companies begin to return unneededcash
back to its rightful owners -- the shareholders.
Many companies are so flush with cash and robustcash flow that
they continue to devote huge sums ofmoney tostock buybacks as
For investors, these buybacks can help restore luster to a
flagging stock price. A few weeks ago, I said that
Apple (Nasdaq: AAPL)
could boost its lackluster stock with a massive buyback.
I suggested the company use its own cash and also borrowfunds
to amplify the buyback's effectiveness.
Well, that's precisely what Apple did, andshares have risen
more than 10% in just those past few weeks.
I looked at this past month's other major buyback
announcements to see whether any other stocks might benefit as
Apple has. I found 12 companies that have recently announced a
share buyback of at least $1 billion, or a buyback large enough
to reduce the share count by at least 7%. Here's what I
Right away, you'll notice two standouts in terms of buyback
spending as a percentage ofmarket capitalization . Both
Denny's (Nasdaq: DENN)
Rent-A-Center (Nasdaq: RCII)
are in a position to significantly shrink their share counts. As
is the case with Apple, these companies are willing to take on
somedebt to buy back stock, which may seem like a risky move. But
both of these companies are generating stable financial results,
and as long as theeconomy doesn't stumble badly, these moves
could really pay off.
Nearly two years ago, I spotted the early signs of aturnaround at
Denny's and noted management's plan to buy back shares. Since
then, the share count has fallen by around 5% to 97 million.
Still, for a company that has generated $40 to $50 million
infree cash flow in each of the past two years (along with
just-releasedguidance of a similar amount of free cash flow for
the currentyear ),earmarking another $120 million toward stock
buybacks is a pretty bold stroke. That would cut the current
share count by a quarter, setting the stage for very robust
per-shareprofit gains , even ifsales growth is muted.
How can Denny's afford to do that? Well, as the company's free
cash flow has strengthened, Denny's has been able to secure much
lower borrowing terms from itslenders , and the company's board
has decided to convert those interest expense savings into
I took a look at this furniture and appliance rental chain in
late 2010, noting that a then-announced buyback plan could shrink
the share count by up to 15%. Indeed, the share count has now
moved below 60 million. It stood at 70 million in 2006 and 80
million in 2004. Rent-A-Center's new $1.25 billion buyback plan
could radically accelerate that trajectory.
Frankly, the move makes ample sense, as sales are growing just
5% annually, albeit withEBITDA (earnings before interest,
taxation,depreciation andamortization ) margins of an
impressively robust 30%. Rather than invest its profits in
further growth initiatives that may or may not pay off,
management instead prefers to radically shrink the share
Right now, consensus forecasts anticipate 2014earnings per
) of around $3.40. Yet a robust share buyback could hike that
figure to $4 or even $5 in a few years, and if that happens, the
current $35 share price looks like a great entry point.
Like Apple and Denny's, Rent-A-Center is taking advantage of
very low interest rates: Its newly issued $250 million debtwill
carry an interest rate of just 4.75%. Considering that this
company's operating cash flowyield is around 15%, this
debt-fueled buyback makes ample sense.
Risks to Consider:
In the event that the economy weakens badly and current cash
flow levels evaporate, then all three of these companies' buyback
plans would look foolish.
Action to Take -->
The era of low interest rates and high cash flow has changed the
equation for many companies. It now makes sense for some
companies to measure their returns on assets,equity
andinvestments and if borrowing costs are well lower than these
returns, then taking up debt to buy back stock could be one of
the wisest moves to boost per-share profits and the share
It's also wise when companies buy back stock that is trading
below tangiblebook value . As an example, I suggested last year
that shares of banking giant
might double if the company bought back stock at such a deep
discount to book. Shares have almost reached my target price.
Unfortunately for Citigroup, regulators forced the bank to
wait on buybacks untilcapital levels are stronger. In the table
above, you'llnote that Citigroup has finally announced a
billion-dollar buyback program. It would have been nice to
proceed with the plan when shares were trading for half of book
value, but as they are still less than 100% of book value, the
buyback still makes sense.