Companies that have excess cash on their balance sheets or that have recently borrowed money have a number of things they can do with that cash. The company could plunge it back into research and development, use it for promotional activity or save it for countless other operational needs.
However, there is another option for spending that cash, and that's for the company to buy back its own stock, and when a company engages in a little repurchasing, the investment community should pay close attention. (To learn more, read A Breakdown Of Stock Buybacks.)
What Makes Buybacks So Special?
Right off the bat, an active share repurchase program says a great deal about where a company's management and board of directors think it is heading. Why else would a company spend millions or even billions of dollars repurchasing its own equity in the open market unless it thought doing so was a wise investment or that its shares were being undervalued by the marketplace?
The mangers know the company better than anyone else, and so if they decide that buying back shares is the best possible use of the company's excess cash, investors should seriously examine the company's prospects and consider investing some of their own excess cash into the stock.
Of course, there is no guaranteeing that when a company repurchases its stock that the value of its shares will ultimately climb. After all, in the stock market, anything can happen. However, there are times when mimicking a company that has repurchased its shares can prove to be an extremely profitable venture.
All Aboard The Buyback Express
Coattailing a corporate stock buyback can pay off handsomely if you pick the right company. Here's a shortlist of companies that have recently issued share repurchase programs, or expanded their existing programs and thus could end up producing sizable returns.
|Company||Date Announced||Maximum Amount Allowed||Price Change Since Mar 10|
|Medtronic (NYSE:MDT)||June 18, 2009||60 M shares||37%|
|AutoZone (NYSE:AZO)||June 17, 2009||$500 M||4%|
|Watson Wyatt Worldwide (NYSE:WW)||June 16, 2009||750,000 shares||-13%|
|Alaska Air Group (NYSE:ALK)||June 12, 2009||$50 M||25%|
|Progressive Corp. (NYSE:PGR)||June 11, 2009||50 M shares||51%|
|Wal-Mart (NYSE:WMT)||June 5, 2009||$15 B||2%|
|Supervalu Inc. (NYSE:SVU)||May 28, 2009||$70 M||15%|
|As of market close June 22, 2009|
Wal-Mart's plan replaces a previous $15 billion plan which had $3.4 billion remaining on it. Since the March low, Wal-Mart is up about 2% when the S&P500 had a 33% rally.
The only one on the list with a decline since March was Watson Wyatt Worldwide which saw a 13% hit. Watson Wyatt Worldwide announced 750,000 share buyback brings the total to over 1.2 million. The new 750,000 will be used as a protection against dilution from shares issued as part of the employee benefit plan. Before this announcement the company had 468,023 shares left to repurchase from the previous plan.
Progressive is only adding 2 million shares because the 50 million share plan replaces the previous plan which still had 48 million left on it. This 50 million accounts for about 7% of the 681 million outstanding shares.
Medtronic's 60 million share repurchase was announced on June 18 and represents 5.4% of outstanding shares. In the last four years, Medtronic has repurchased 138 million shares or $6.9 billion worth of stock. Dividends currently sit at $20.5 cents per share yielding 2.5%.
Insiders And Earnings
Alaska Air had repurchased $112 million worth of stock in 2007 and 2008, and continues its plan to repurchase share "opportunistically" according to CEO Bill Ayer. On June 15, Alaska Air Director Kenneth J. Thompson added an additional 1,500 shares to his holdings, bringing the total to 10,082.
Autozone's additional $500 million buyback adds to their already $7.4 billion holding. This new announcement brings the total plan to $7.9 billion. In Autozone's consolidated balance sheets for the three months ending May 9, 2009, cash and equivalents decreased 61% to $94 million. On a positive note, earnings per share increased 25% on a diluted basis from $2.49 to $3.13.
The Bottom Line
The stock market is full of examples where companies have bought up boat loads of their own stock, and then watches the share price rise steadily in the years to come. So, when you see a company that is buying its own stock, it is usually a good idea to do a little research to see if the stock is truly undervalued.(Insider tracking can inform your investment strategy, but it requires research and a level head. Find out what to look for in When Insiders Buy, Should Investors Join Them?)
Personal FinanceWhat does an equity research analyst do on an everyday basis?
Mutual Funds & ETFsFind out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
Mutual Funds & ETFsFind out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
Mutual Funds & ETFsFind out about the iShares Agency Bond exchange-traded fund, and explore detailed analysis of the ETF that tracks U.S. government agency securities.
Mutual Funds & ETFsLearn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
Mutual Funds & ETFsFind out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
Mutual Funds & ETFsLearn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
Stock AnalysisMillionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
ProfessionalsThe market has corrected...now what? Here's what you should consider rather than panicking.
Mutual Funds & ETFsDiscover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
Corporate initiative to assess and take responsibility for the ...
The value of an asset less the value of all liabilities on that ...
A security that tracks an index, a commodity or a basket of assets ...
A category of ratios measuring profitability calculated as net ...
A three-month period on a financial calendar that acts as a basis ...
A financial ratio that measures the extent of a company’s or ...
The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>