This is a great time to be running a public company.
The surging stock market has created billions in wealth for
the leading officers and directors, as previously granted stock
options are now deep in the money. Of course, companies don't
like to publicize the fact that executives are reaping huge gains
while leading the share count to bloat. Add all of their shares
into the current base of stock, and investors would really be up
That's why many companies offset these lush stock options
programs with share buybacks. As long as they are able to keep
the share count flat, investors are unlikely to grumble too
loudly. But it also means that you should be skeptical when you
hear about buyback announcements.
Case in point: Regional bank
, which conducted a pair of buyback plans over the past two years
totaling nearly $800 million. That equated to nearly 5% of shares
outstanding. But in a study conducted by Deutsch Bank, KeyCorp
actually shrank its share count by just 1%. In effect, most of
that $800 million went toward enriching executives, not
That's why it's crucial to track companies to see if they are
really moving the needle. The good news: Some companies' buyback
plans have really benefited investors.
Home Depot's (NYSE:
, share count, for example, has fallen from 2.2 billion in 2005
to a recent 1.4 billion. That 36% drop in shares outstanding has
a direct and salutary benefit on earnings per share (
Cisco Systems (Nasdaq:
is another fine example: Its share count has dropped from 6.6
billion in 2005 to a recent 5.4 billion.
And these firms have company. Here are three other companies
that are not simply looking to offset stock option grants with
buybacks but are developing a proven track record of share count
|1. Macy's (NYSE:
|A tough environment for consumer spending has certainly
been felt at this department store chain. Annual sales are
growing just 1% to 2%, and even that's solely due to price
increases. Still, Macy's is in the midst of a powerful
upturn in earnings per share. EPS rose from around $2 a
share in fiscal 2011 to more than $3 a share in fiscal
2013, and analysts see that figure exceeding $4 a share in
the fiscal year that begins next February.
Credit goes to a fast-shrinking share count. Shares
outstanding had ballooned to 548 million by fiscal 2007,
but steadily dropped to 430 million in fiscal 2012. Since
then, this trend appears to be accelerating.
Macy's falling share count (millions)
|2. Marathon Petroleum (NYSE:
|I'm a huge fan of refinery stocks,
as I recently noted
, thanks to very high potential dividend yields at the
industry's niche MLPs (master limited
partnerships) and impressive buyback programs among the
big, traditional refiners such as Marathon Petroleum.
Marathon's share count has fallen from 364 million in
the third quarter of 2011 to 340 million a year later and a
recent 311 million. That's a 15% reduction in shares
outstanding in just two years. And Marathon appears to be
stepping on the gas. In September, this refiner added $2
billion to an existing buyback plan that still had $1.3
billion remaining. That should shrink the share count by
another 10% to 12%.
The falling share count has softened the blow of a
compression in oil refinery margins. Yet analysts expect
those margins to widen again in 2014, meaning Marathon
should post higher operating income and have a smaller
share count. The current forecast of a 20% hike in 2014 EPS
(to around $9.20 a share) is starting to look far too
|3. Motorola Solutions (NYSE:
|It's been nearly a century since this company developed
the first in-car radio. And despite a 2011 sale of the
company's telecom business to
, this company is still a leader in wireless communications
equipment. It's a sturdy niche, thanks to recurring
revenues from federal, state and local governments, but
top-line growth has become anemic.
Still, a fast-shrinking share count has generated
impressive EPS growth. Over the past eight quarters, shares
outstanding have fallen from 335 million to 262 million.
Combined with cost cuts that have boosted profit margins,
MSI now can deliver more than $4 in annual EPS, up from $1
to $2 in annual EPS just a few years ago.
Risks to Consider:
As long as the market keeps on rising, insiders at many
companies will keep cashing in their stock options, which will
offset the impact of share buybacks.
Action to Take -->
As more companies pursue massive and ongoing buyback programs,
investors are not as concerned if top-line growth is anemic. As
long as buybacks keep shrinking the share count by a considerable
amount, then robust EPS growth can help boost stock prices yet
higher. If you bought a stock on the basis of a seemingly
impressive buyback program, then it pays to monitor the diluted
share count from quarter to quarter. If the share count isn't
falling, then management isn't sufficiently looking out for your
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