Companies Buying Their Own Shares

By Peter Cherewyk | April 26, 2010 AAA

Share repurchases that were recently announced could take time to occur, or might not happen at all. These announcements either add to the prior plan, or could replace the previous plan all together. In the case of MVC Capital, it is an initial announcement. intentions or results are tough to predict, essentially when the company is investing in itself.

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Company Repurchase Amount Date Announced Market Cap
Amdocs Limited (NYSE:DOX) $700 million April 22 $6.4 billion
Global Payments Inc. (NYSE:GPN) $100 million April 23 $3.6 billion
International Business Machines (NYSE:IBM) $8 billion April 27 $165 billion
MVC Capital, Inc. (NYSE:MVC) $5 million April 27 $338 million
Orbital Sciences (NYSE:ORB) $50 million April 23 $1.7 billion
Synaptics Inc. (Nasdaq:SYNA) $100 million April 22 $1.07 billion
UMB Financial Corporation (Nasdaq:UMBF) 2 million shares April 27 $1.7 billion

A company being authorized to repurchase shares is different than a company actually doing it. These companies have been given the go-ahead to reduce the number of shares outstanding. Share repurchase will adjust the book value of a company so value investors will need to stay on their toes. In the group, the lowest price to earnings is IBM (NYSE:IBM), sitting around 12, but looking into the forward P/E, IBM has a multiple of 10.5. Also digging into forward price to earnings Amdocs Ltd. (NYSE:DOX) sits around 13. Amdocs Ltd. has beat earnings estimates in each of the last four quarters, which might be why in the last week analysts, according to Thomson Financial Networks, have raised next quarter EPS estimates to 57 cents (a 1-cent increase), and full year estimates up 4 cents to $2.26. (Learn the techniques that Buffett, Lynch and other pros used to make their fortunes; check out The Value Investor's Handbook.)

Value
Of the group, the company that has the lowest price-to-book is MVC Capital, Inc (NYSE:MVC), at 0.81. MVC Capital focuses on investing in small- and medium-sized companies, as a business development company. Share repurchases will reduce the shares outstanding, and could make the shares look overvalued. Helping MVC out is the fact that it has the highest dividend of the group, paying 3.45%, with a fairly consistent payout since 2005. Recently, it announced a renewal of a $50 million credit facility at LIBOR plus 4.5% and 1.25% LIBOR floor, which will expire April 27, 2010. The repurchase agreement has no time limit, and will occur at the price set by the market.

The Bottom Line
In the end, the company must decided what the best use of its capital is, in order to invest in its own company. This could create more value for current shareholders. It could be prompted by a steep reduction in share price, beyond what the company believes is warranted. Of the group, the company with the biggest drop in price year-to-date is Global Payments Inc. (NYSE:GPN), with a drop of 17%. IBM is down as well, with a 1.6% drop, from $130.90 to $128.82. IBM is not going to be as volatile as the $3.6 billion market cap Global Payments, and it does pay a 1.7% dividend yield. (The P/B ratio can be an easy way to determine a company's value, but it isn't magic! Read more in Value By The Book.)

Given the huge difference in motivations, ability or even intent, it will be tough to predict the effect of these announcements. Usually the company will tell you it is a sign of the management's confidence in the company. (To learn more, see How Buybacks Warp The Price-To-Book Ratio.)

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