A healthy cushion of cash is always valued by large, stable
companies. Many companies make good use of that cash by buying back
their own stock. Just a few weeks into
, we've already seen a hefty slate of new stock buyback
announcements. That's where I like to look for value.
It's obvious to note that the larger the buyback (in relation
toshares outstanding), the greater the potential to increaseEPS .
So I've looked at all the companies that have recently announced
plans to buy back at least $500 million (and at least 5%) of
Here's what I found...
Market cap. ($M)
Buyback size ($M)
% of market cap.
|Ball Corp. (
|Shaw Group (SHAW)
|AES Group (AES)
Companies occasionally use buybacks to make a statement about the
confidence in their business prospects. That's surely the case with
this drug giant, which is spending very heavily to find the next
blockbusters. To be sure, the company has its detractors:
AstraZeneca hasn't delivered a major new drug recently and had to
drop several high-profile drug candidates in 2010 after they
generated weak clinical data. That's whyshares trade for less than
eight times projected profits.
Company CEO David Brennan is undeterred. He's been compiling a
world-class roster of research and development (R&D) talent and
given them support at a time when many other Big Pharma research
budgets are being cut, though he acknowledges that current R&D
efforts are unlikely to materially boost the top-line for at least
another two to three years. The company generated $33 billion in
sales in 2010, and is likely to be in the $30-33 billion range for
Despite the challenges, an increasing number of analysts are
starting to thinkshares represent real value for long-term
investors. For starters, they note AstraZeneca dodged a bullet when
the Food and Drug Administration decided last summer to extend
patent protection for its blockbuster Crestor drug until 2016. In
addition, there is one very promising drug in the near-term
pipeline: Brilanta, a blood-clotting drug, which has already been
approved for sale in Europe and may get the U.S. nod this summer.
Analysts think it could be a blockbuster, as it appears to be even
more effective than Plavix, which generates more than $6 billion in
Equally important, the projectedcash flow likely to be generated by
AstraZeneca's existing crop of drugs is substantial: "We see a
potential $73 billion as being returned to shareholders over the
next 10 years, more than today's market cap" note analysts at
Citigroup who recently raised their rating to "Buy."
To keep investor attention on the
, management recently boosted thedividend by 11% and boosted a
share buyback to $4 billion. The share count has shrunk for each of
the last eight years, and if current buyback plans continue, the
company will have reduced the share count by 30% in the 10 years
ended 2012. That partially explains whyEPS has steadily risen
during the past decade, from $1.64 in 2002 to a projected $6.56 in
2011. As noted,earnings growth is likely to flatten for the next
few years, though shares should continue to appeal as they carry a
12%free cash flow yield . If CEO Brennan's aggressive bet on
R&D pays off, AstraZeneca may again be in growth mode in a few
years while rival drug companies are shrinking.
What do you do if your business throws off gobs of cash but growth
prospects are lacking? You buy back stock. Symantec has already
taken its share count from 1.02 billion in 2006 to about 800
million. After a just-announced new buyback is complete, the share
count should drop below 750 million.
To be sure, this stock is right where it was five years ago, while
many rivals have seen their share prices rise well higher. But in
that time, Symantec has generated $6.4 billion infree cash flow ,
which accounts for almost half of itsmarket value .
But shrinking share counts aren't enough to get investors excited.
Instead, they want to see growth, or at least some sort of major
move that unlocks value. My colleague Ryan Fuhrmann notes that
looks ripe for a sale
of part or all of the business.
That may or may not happen, but analysts at Citigroup think shares
are appealing on their own merits. They note that current consensus
forecasts appear too low, as Symantec should deliver decent growth
in its various businesses in 2011. And they think this tech stock,
at 11 times projected 2012 profits, is unlikely to suffer in a
market pullback compared to other loftier tech stocks. They see
shares rising to $22, or 25% above current levels.
Action to Take -->
Buybacks bring an added benefit. If the market swoons and these
stocks take a hit, they can buy back even more shares with their
allotted funds. That's why it pays to stick with these names even
if times get tough. An even larger reduction in the share count
will be the result when shares ultimately rebound.
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.