Over the past few years, I've been conducting quarterly reviews of companies that are aggressive repurchasers of their own stock.
#-ad_banner-#I've tended to focus on companies that announced a share repurchase plan that represents at least 5% of shares outstanding. Anything smaller may not have much of an impact on earnings per share (EPS).
Yet in recent months, we here at StreetAuthority have broadened our measure of corporate generosity to focus not just on buybacks but also dividends and debt reductions. These three pillars combine to form what we call our Total Yield strategy, and we're always on the prowl for companies that can deliver a total yield in excess of 10%. Below you'll find a group of companies that meet the criteria, based on share buyback announcements during the current earnings season.
A few notes about this table. First, not all of these buybacks will be completed over the next 12 months, so the total yield analysis may cover a multi-year period. Second, only some of these companies are also reducing debt. In those instances, the total yield is even higher than the figures you see above.
Also, many of these companies are buying back shares while they trade near multi-year highs. That's not an ideal time for buybacks, but many companies correctly note that future share prices may end up well higher in coming years -- if the market continues to advance--and it makes little sense to try to time the market with buybacks. As a silver lining, these stocks would likely fare better than most in a falling market, thanks in large part to their Total Yield strategy.
|Out Of Ideas?|
| Another key complaint about large buybacks: They may signal that a company has run out of other opportunities for its cash, such as acquisitions or internal investments. For example, industrial conglomerate 3M (NYSE: MMM) plans to buy back fully one-quarter of its shares over the next few years.
With projected sales growth of less than 5% in 2014 and 2015, 3M appears to be stuck in a growth rut. Yet buybacks will soften the blow by shrinking the share count fast enough to boost EPS at a more rapid pace. Analysts expect EPS growth of 11% in 2014 and 2015.
And 3M's management believes that the huge buyback won't impede the company's ability to pursue acquisitions. "3M reiterated it plans to spend $5 to $10 billion on M&A (mid- to large-sized deals likely) through 2017, and 3M was positive on the pipeline," note analysts at UBS, who rate shares a "buy" with a $151 price target.
|For Appearance's Sake|
| Some companies are accused of using large share buyback plans to quell any controversy that may surround them. For example, short sellers continue to circle over Herbalife (NYSE: HLF), which was recently reviewed by my colleague Melvin Pasternak.
In a similar vein, kiosk vending firm Outerwall (Nasdaq: OUTR) (which was also profiled recently by another colleague, Marshall Hargrave) has had to beat back a hefty amount of skepticism for much of the past five years. And even though shares have rallied to fresh all-time highs, management has sought to finally put the short sellers to rest with a $350 million share buyback that could erase nearly 20% of the share count.
| To be sure, the rising stock market over the past half-decade means that few share buyback announcements are coming while stocks hold deep value. Indeed, most of the stocks on the table above sport forward price-to-earnings (P/E) multiples that are in line or above the market average. And most of these stocks are valued at a solid premium to book value.
Reinsurance firm Validus Holdings (NYSE: VR) is a clear exception. The current $3.5 billion market value is at a discount to tangible book value of $3.7 billion. Equally impressive: Shares trade for less than 7 times trailing earnings. Though per-share profits are likely to be stuck in the $4.75 to $5 a share range in 2014 and 2015, Validus appears poised to generate far higher profits in subsequent years. That's because insurance companies -- or any companies with large net cash balances -- are likely to greatly benefit from the move up in interest rates, as I noted back in October.
Analysts at Merrill Lynch, who rate shares a "buy" with a $41 price target, see tangible book value rising to around $43 by the end of the next year. That means the current $500 million share buyback plan is especially well-timed. As I've noted in the past, buybacks on below-book stocks is the closest thing there is to a no-brainer investment.
Risks to Consider: Some of these buyback programs may take longer to complete if these companies decide they should go slow while the market remains near half-decade highs.
Action to Take --> Companies that are pursuing robust Total Yield strategies are expressing both a confidence in their businesses, and a clear willingness to return cash to shareholders. Of those the stocks making recent share buyback announcements, Validus Holdings appears to be the only true value play, and as such, it merits serious consideration from investors.