After stocks slumped badly this summer, many questioned the
wisdom of big stock buyback programs. After all, companies were
spending huge amounts of cash on repurchases at formerly higher
prices and would have been able to buy a lot more
if they waited until stock prices really slumped. Yet just as
individual investors can't time the
, neither can corporations. And with cash balances rising higher
and higher, buybacks, along with dividends, are the most logical
use of a company's money right now.
The real takeaway of buybacks is the real
it can provide to
earnings per share (
growth. Take toy maker
as an example.
is likely to fall roughly $25 million to $375 million this year, as
the toy maker derives fewer benefits from the Transformers movie
franchise than it did in 2010. Yet
per share are likely to be around $2.80 this year, up around 7%
from a year ago. Goldman Sachs figures that ongoing stock buybacks
will actually boost the company's 2011 results by around $0.20.
Were it not for the shrinking share count, Hasbro would be
suffering from negative year-over-year
For many companies in the midst of big buybacks, a shrinking share
count can help propel moderate net income gains into more robust
EPS gains. Here are three stocks that are clearly benefiting from a
rapidly shrinking share count.
1. Intel (Nasdaq:
The fact that this chip giant delivered 24% net income growth (on a
non-GAAP basis) in its third quarter is surely impressive, when
much of the investment community had seemingly written off the
desktop and laptop computer markets in the face of the tablet
computer onslaught. But the fact that earnings per share rose by
33% should be even more attention-grabbing.
Intel is doing its best to appeal to dividend-focused investors,
spending $1.1 billion in the most recent quarter in support of a
payout that currently yields 3.6%. Yet another $4 billion was spent
re-acquiring company stock, eliminating 186 million shares from the
share count. In fact, Intel is so focused on shrinking the share
count that it just announced plans to borrow $5 billion to increase
its current share repurchase plan by another $10 billion to bring
it up to $14 billion. ($4 billion remained on the previous plan.)
If completed, that would reduce the share count by an additional
11%, which means net income growth could slow to just 5%-10% in
2012, but EPS growth would still stay in the more impressive
15%-20% range. Despite a 4% jump in Wednesday trading, shares still
trade for less than 10 times likely (upwardly revised) 2012
2. Ball Corp. (NYSE:
A fast-rising Chinese middle class is the reason this company is
boosting sales at a double-digit clip this year. Ball is the
largest supplier of soda cans in the United States, the
second-largest in Europe, and the largest in China. (The company
also has strong
in food cans.) It's a healthy business: Ball is expected to
generate $400 million in
free cash flow
this year, and $500 million in free cash flow next year, according
to analysts at Merrill Lynch.
You would think aluminum cans is a fairly boring and quite mature
business. Yet at a recent analyst meeting, Ball's management ran
through a series of new types of cans and bottles (such as its
Alumi-Tek re-sealable bottles) that are driving growth. But
management's top-line growth plans aren't really the story here.
Instead, it's what all that free cash flow is doing to the share
count. The number of
has fallen for seven straight years to around 183.5 million by the
end of 2010, but that figure may fall to 150 million by 2013,
according to Merrill Lynch. The EPS impact: Merrill assumes
after-tax income will rise almost 20% from $430 million in 2010 to
$511 million by 2013. But a radical cut in the share count should
boost EPS 42% during that time frame, from $2.29 to $3.25.
3. Assurant (NYSE:
This specialty insurer has managed to shrink its share count every
back in 2004. And while shares remain at a tangible discount to
, management intends to keep buying back stock. The insurer bought
back $533 million worth of stock in 2010, and analysts at Sterne
Agee think Assurant will spend $500 million on buybacks in 2011,
another $600 million in 2012 and $500 million more in 2013. This
would reduce the year-end share count from 2011 to 2013 by 26%.
So even though the analysts foresee
rising 14% during that time frame (from $426 million to $489
million), they think EPS will rise from $4.41 in 2011 to $6.50 in
2013, a 47% jump. By the end of 2013, tangible book value per share
should approach $55. That's far above the current $38 share price.
Risks to Consider
: The biggest risk for these companies is a newly-weakened
bringing down stock prices across the board, which would make these
big buybacks look like an ill-timed, injudicious use of a company's
Action to Take -->
These companies are boosting per share profits at a fast clip, even
as the economy remains in a funk. Shrinking share counts also set
the stage for sharply higher profits when the next upswing in the
economic cycle arrives. Any of these three stocks merit further
research on your part, but from where I sit, they look pretty
-- David Sterman
Disclosure: Neither David Sterman nor StreetAuthority, LLC hold
positions in any securities mentioned in this article.
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