The recent pullback in thestock market brings a silver lining
for some companies.
Those firms that have announced new or extended stock buyback
programs can now retire moreshares for a fixed dollar amount. And
if the market slumps deeper in coming weeks and months, these
buyback programswill deliver an even better bang for their
I recently wrote about the stunning $455 billion in stock that
has been reacquired by firms over the past fourquarters , noting
that the trend isn't just a passing fad. In fact, the past two
months of buyback announcements signal that the current quarter
will be another sizzler.
A month ago, I tooknote of roughly $20 billion worth of
buyback plans announced in July (which only partially reflects
the full amount of buybacks that month) and I've tallied the
buyback programs announced in August (among companies buying at
least $400 million), and this new group accounts for an
impressive $29 billion in share buybacks.
We can glean a few clear trends from these share
- The majority of these plans are simply new plans to replace
old plans that have now been completed, meaning these companies
buy back their shares on a regularbasis .
- Many of thesestocks are valued right near the
marketmultiple of 15 to 16 times projectedearnings .
- Many of these stocksoffer up a decentdividend as well,
boosting their totalcash return to shareholders.
- Most of these buyback programs represent a meaningful
amount of the current share count. (Both
Emerson Electric's (
buyback programs are not really meaningful as they are only
likely large enough tooffset stock option grants ).
- Most of these stocks are near their 52-week highs,
extending the theme of the current era that companies no longer
wait for their stock to fall out of bed before buying back
stock. Nor do any of these stocks trade below tangiblebook
value , which also had historically served as a key litmus test
of buyback efficacy.
Still, the longer-term buyback programs for some of these
firms have surely been impressive. Take toy maker
as an example. The company's new $500 million share buyback
(which would reduce the share count by 11% at current prices) is
reasonably impressive -- until you look at what Hasbro has
already been doing for nearly a decade.
Hasbro's Shrinking Share Count (millions)
By the end of 2013, Hasbro's share count will likely have
fallen by 37% since 2005. And chances are, Hasbro will simply
announce another buyback when this current plan is done.
On a related note, buybacks should also be seen as a key
pillar of corporate staying power. As I noted in early 2012,
investors were overlooking Hasbro's deep history and strong
roster of brands, assigning the company amarket value half as
large as games maker
Zynga's (Nasdaq: ZNGA)
Common sense has returned, and Hasbro now sports a much larger
market value than Zynga. Remember that the next time you see an
unproven company quickly leapfrog past a proven competitor like
that. Reality eventually sets in.
Auto parts maker
clearly embodies the new thinking about share buybacks. The
company announced plans last month to sell its $1.5 billion stake
in a joint venture with a Chinese partner. Visteon could have
looked to pay downdebt or make anacquisition , or simply keep the
($1.2 billion after-tax) proceeds. Instead, almost all of
themoney will go toward a share buyback that might reduceshares
outstanding by 25%.
Lastly, conservative investors may want to check out
Renaissance Reinsurance (
which has been buying back shares for seven straight years,
reducing the share count by 30% in that time. The newly announced
buyback plan, which could absorb up to 13% of the additional
share count, is a primary focus now. But when share buybacks are
no longer the focus, then robust dividend growth will likely be
the norm as this company can afford tosupport a $4.50 a share
dividend (equating to a 5%yield ) while still keeping thepayout
ratio below 50%.
Risks to Consider:
Large buybacks often signal tepid organic growth prospects,
so if investors continue to gravitate toward aggressivegrowth
stocks , these shares mayunderperform .
Action to Take -->
Most of these stocks appear reasonable valued, withforward
earnings multiples in the mid-teens. Yet steady buybacks promise
to tangibly boost earnings per share in coming years, pushing
these stocks deeper into value territory.
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