It's an open secret that
can't seem to find meaningful growth opportunities. The massive
retailer's sales grew just 1% in fiscal (January) 2010, 3% in
fiscal 2011 and will be hard-pressed to grow much more in fiscal
2011 and 2012. Tepid growth explains whyshares have been flat for
more than a decade.
Yet if you go straight to thebottom line , you see a much better
picture. Profits per share have been steadily rising, jumping
another 12% in fiscal 2011, and are expected to rise nearly 10% in
. Massive share buybacks get the credit. The retailer has been
absorbing huge chunks of its own stock, spending more than $23
billion in cumulative
free cash flow
in the past three years. [For a deeper look at Wal Mart's
prodigious free cash flow,
Wal Mart is at it again. In the week of June 6, the company
announced plans to buy back another $15 billion of its stock. The
company's share count has already shrunk from 4.4 billion in fiscal
2003 to a recent 3.7 billion. This new buyback plan may take this
figure down to 3.4 billion. Simply delivering flat sales andnet
income will still boost Wal Mart's
earnings per share (
by roughly 8%. Toss in forecasts of moderate 3% to 5% sales growth
and the commensurate
, andEPS may actually grow in the low teens; not bad for a company
that has been shunned by Wall Street for a decade.
The decision to make ever larger buybacks makes clear sense. So
many companies are flush with cash, but few have current organic
growth prospects. Why not radically shrink the share count while
are cheap? Here are a few other blue chip stocks seeking to use
their bulletproof balance sheets to bolster per-share profits.
1. Aetna (NYSE:
This health care insurer has been using
to repurchase shares for a number of years.
In late May, Aetna announced plans to buy back another $750 million
in stock, which partially explains why per share profits are
expected to rise roughly 20% in 2011 even as sales are expected to
2. Hasbro (NYSE:
This toy maker had nearly 200 million shares outstanding back in
2005 and a series of stock buybacks has pushed that figure below
140 million. Another $500 million share buyback announced in
mid-May promises to drop the share count below 130 million. This is
great timing because Hasbro has licensed key characters to serve as
the basis for a number of upcoming movies, which is likely toyield
solid high-margin revenue gains and boost the
I profiled Hasbro a year ago
. Shares have barely budged since then, even as per-share profits
keep growing at a solid clip. Analysts expect
to grow about 15% in 2011 and again in 2012. Shares trade for a
very reasonable 12 times projected 2012 profits.
3. Home Depot (NYSE:
This do-it-yourself retailer may be the reigning champion of
buybacks. The company bought back at least 50 million shares every
year from 2002 through 2008, pulled back on buybacks in 2009 and
2010, and is back in the game with a fresh $1 billion buyback
announced in late March.
This should help boost per-share profits about 14% to 15% in 2011
and 2012, even as the housing market and general consumer spending
remain very weak. Presumably, per-share profit growth will keep
rising in 2013 and beyond as the housing market and consumers
finally spring back to life.
Action to Take -->
In an ideal world, these companies would have been especially
aggressive with buybacks a few years ago when the stock market
andeconomy were slumping. Yet that's usually the time when chief
financial officers (CFOs) like to hoard their cash. If the current
continue to weaken, then these CFOs can at least take solace in the
fact that any further drops in the stock price simply means more
shares can be re-acquired.
That's precisely what's happening with
Cisco Systems (Nasdaq:
. The troubled tech titan announced a further $10 billion buyback
in late November (after previous $72 billion in buybacks that began
in 2001), with its shares trading around $19. The stock plunged
from $24.50 to $20.50 in just one day (Nov. 11, 2010), creating a
seeming bargain. The company announced the buyback plan about two
weeks later and shares have since drifted down toward the $15 mark.
This will allow Cisco to buy back even more stock with that $10
billion plan, but it highlights the risk of repurchasing shares
before a bottom has truly been reached.
-- David Sterman
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Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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