As earnings season reaches the halfway point, we're once again
seeing stunningly large share buyback announcements.
Yet investors are scratching their heads. These buybacks are
often seen in tandem with share prices hitting fresh multi-year
lows. Gone are the days when companies would resort to buybacks
only when their stock was deeply out of favor, far from its
Why are these companies "buying at highs"? In almost every
instance, they appear to have little other use for their cash.
They could go out and complete acquisitions that boost the top
and bottom lines. Or they could seek to offer up very high
dividends. Instead, they simply are managing their business with
an eye toward maximizing cash flow, and using buybacks as a
primary way to reward investors.
Here's a look at companies that have recently initiated or
extended share buyback programs that could shrink the numbers of
shares outstanding by more than 10%.
You might notice that one company doesn't meet the 10%
is included in this list, despite a share shrinkage potential of
just 6%, for a pair of reasons.
First, Pulte is one of the few companies buying back shares
after those shares have fallen notably from the 52-week high.
Pulte, along with other homebuilders, has drifted out of favor
recently as mortgage rates begin to rise and investor fears of a
short-circuited housing recovery grow.
Pulte's move to buy back shares right now is also noteworthy
because the homebuilding industry presumably intends to build
many more homes in coming years than has been the case in recent
years. One might think that Pulte would have preferred to deploy
its cash on new real estate and construction. Perhaps land prices
have rebounded so quickly that Pulte thinks its stock represents
greater relative value than before.
Analysts at UBS, who boosted their rating on the stock this
week to "buy" (with a $22 price target), note that the buyback
was not the result of a sudden change of heart regarding growth
strategies. "About 24 months ago, Pulte outlined a plan to focus
more on risk-adjusted returns through the cycle, with an emphasis
on maximizing (return on invested capital) and returning cash to
shareholders where appropriate," they said, adding: "Management
has deliberately been slowing down the sales pace to focus on
price and maximizing profitability. We believe this is a prudent
strategy given land scarcity in better locations."
The PR Spin?
Companies are sometimes accused of using buybacks as a way to
call attention to their stock after a bit of controversy or
near-term sales weakness. Indeed, the $1.5 billion buyback
program for Intuitive
Surgical (Nasdaq: ISRG)
is sure to generate its own controversy. The maker of robotic
surgery equipment has experienced a hefty plunge in its share
price after a quarterly shortfall.
If ISRG's problems are short-lived, as management contends,
then this buyback will have proved to be a good use of
shareholder funds. But if the recent quarterly weakness is a sign
of longer-term growth challenges, as I suggested recently, then
this buyback will have looked foolhardy considering that shares
still trade for more than 20 times projected 2014 profits.
The Proven Share Count Shrinker
It may have been easy to overlook the moderately sized $300
million buyback announcement from apparel licensing firm
Iconix Brands (Nasdaq: ICON)
. But this is a company that is fast on its way to a much smaller
Thanks to previous buybacks, the share count has fallen from
76 million in the third quarter of 2011 to a recent 59 million,
and the just-announced buyback plan should take that figure below
52 million by the end of this year (even after accounting for
some offsetting stock options). That works out to be a 32% drop
in the share count, which has the direct impact of boosting
earnings per share (
) by a commensurate amount.
Iconix Brands has never been especially popular among Wall
Street analysts, due to a lack of organic growth. Management aims
to acquire existing strong brands and milk them for profits, but
it often does little to boost the growth profile of those brands.
Yet the dual strategy of acquisitions and buybacks is making for
some nifty financial engineering. EPS is on track to rise from
around $1.50 in 2012 to $2.50 by 2015, according to consensus
forecasts. Were it not for those buybacks, projected EPS growth
would be a lot more muted.
The Book Value Play
Lastly, I can't resist the urge to take note of insurance firm
Platinum Underwriters Holdings (
The company's current market value is $1.7 billion while
tangible book value stands at $1.9 billion. As I've noted before,
any share buybacks completed while shares trade below book value
is a no-brainer, as they can shrink book value per share at an
accelerated pace. Platinum's new buyback $250 million buyback
program comes on the heels of many other similarly sized
buybacks. Shares outstanding stood at 66.4 million at the end of
2007 but will likely fall below 30 million this quarter.
Risks to Consider:
These buyback plans are being pursued at a time when the
major market averages have risen sharply in recent years. If the
market pulls back, some of these buybacks will have appeared to
Action to Take -->
As these examples show, you want to focus on companies that are
either buying back stock that trades below book value, or have a
proven track record of share count shrinkage that gives a solid
lift to EPS. Considering almost all of the stocks in the table
above are pursuing double-digit buybacks, the resulting impact on
EPS could be equally impressive.
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