Stock buyback blitz continues
This year many cash-rich companies have been repurchasing their own shares ahead of the possible end of the Bush-era tax cuts.
The 2012 buyback blitz continues. In October, dozens of companies announced new buyback plans or extended old ones, including IBM (IBM), which said on October 30 it would increase its stock refund by 75% to $11.7 billion. The company has spent $3 billion on share repurchases so far this year. The increase represents an additional $5 billion in stock, or about 2% of the company's market value. Joining IBM at the billion-dollar level is TRW Auto (TRW), which pledged to spend $1 billion to buy back stock (18% market value) over the next two years.
In July we wrote about the earlier group of companies buying back their own stock. At that time, American Greetings (AM), Baxter (BAX), CBS (CBS), Lockheed (LMT), News Corp (NWSA), Radio Shack (RSH), Travelzoo (TZOO) and Visa (V) had all pledged billions in repurchase plans.
Buybacks have numerous benefits. They reduce assets on the balance sheet, which translates into a higher return-on-assets and return-on-equity -- all without any change in earnings. They also drive down that ubiquitous measure, the price-to-earnings ratio, which makes it appear that a company is less expensive than it was before the buyback.
As far as benefits for the shareholder go, buybacks are usually considered a positive when the stock is selling at a material discount to its intrinsic value. As a general rule, buybacks tend to boost investor confidence. As Crain's Detroit Business quoted Matthew Stover, an analyst with Guggenheim Securities, on the larger than expected TRW buyback: "Management and the board took a simpler and larger approach, which is ultimately more attention-grabbing and underlies their confidence in the outlook for the company."
One other reason buybacks have been the rage in 2012 is the uncertainty around the Bush-era tax cuts that could end this year. Those taxes cap both the long-term capital gain rate and stock dividend rate at 15%. Buybacks are taxed at the capital gains rate.
Like IBM, American Capital Agency (AGNC) took advantage of the closed markets last week, pledging $500 million (12% market value), in a repurchase program. AGNC specified that it would only buy shares when they are trading below book value.
Aspen Insurance Holdings (AHL) and WABCO (WBC) have each pledged $400 million, representing 18% and 12% market value respectively. Aspen made the announcement in its earnings call in mid-October while WBC made its announcement while the markets were closed for Hurricane Sandy.
Earlier in October, Dana Holdings (DAN) said it would spend $250 million (13% market value) on a buyback program, while Zynga (ZNGA) and Rent-A-Center (RCII) said they would spend $200 million each, representing 11% and 10% market value respectively. It's the first time Zynga has ever initiated a repurchase program and it was clearly done to boost investor confidence as the company shares have fallen from a 52-week high of $15.91 to $2.26 in Tuesday's trading. RCII announced its buyback plan at the same time it said its third quarter earnings would be less than the consensus estimate.
The largest market value buyback, at 79%, belongs to Willis Lease Financial (WLFC), which announced a five-year $100 million buyback plan. The announcement was made in early October and as of mid-month it had repurchased $6.1 million worth of shares.
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