Stock buybacks: Another kind of dividend

Companies are using both cash and borrowed money to repurchase their shares. Shareholders like it and more repurchases are on the way.

By TheStreet Staff Dec 28, 2012 5:04PM

thestreet logocorbisBy Marc Courtenay

Did you notice what happened to Smith & Wesson's (SWHC) share price when the company's board authorized the purchase of an additional $15 million of Smith & Wesson common stock, to be purchased between now and June 30, 2013?

That's not a huge stock buyback, but it helped the company's shares, which I wrote about on TheStreet on Dec. 21, to surge over 3% on Thursday Dec. 27. The stock traded as low as $7.95 on the 21st and closed at $8.26 on the 27th. At $8-a-share, a $15 million buyback reduces the outstanding float by 1,875,000 shares.

The additional amount was authorized after the company completed the $20 million stock repurchase program that was announced back on Dec. 6. SWHC plans to fund the repurchases using cash on hand and working capital. The point is that stock buybacks usually create an immediate benefit.

Even giant companies like Dow 30 component United Technologies (UTX) will be getting down to the business of buying back up to 1.33% of the company's outstanding shares.

This and some other savory news announcements (see the Web site) about selling off a few holdings of the behemoth conglomerate have helped boost the share's price. Potential traders and investors should read them carefully.

From an intraday low Nov. 14 of $74.44, shares of UTX have been lifted over 12% to the Dec. 20 high of $83.64. UTX shares closed at $82.07 on Dec. 27, even though many analysts look upon UTX as one of the three most promising stocks for 2013 of the 30 that comprise the DJIA.

UTX shares are currently paying a 2.61% dividend based on a yield-to-price at $82. The following 5-year chart colorfully illustrates the history of UTX's share price as well as its quarterly diluted year-over-year earnings per share and revenue growth. What jumps out at me when I look at this chart is that both EPS and quarterly revenue growth are heading in the right direction.

utx chart

UTX will next step into the earnings confessional on Jan. 21, 2013. In the meantime it's not hard to understand why Jim Cramer and our Research Director Stephanie Link recently wrote to subscribers of ActionAlertsPlus, "UTX is a way to play the global aerospace cycle with the synergy kicker from the Goodrich acquisition, which will add as much as 70 cents to 2013 earnings."

 

"The valuation [of the share's price] trades at a discount to its historical average and we expect the company to resume its buybacks/dividends [italics added] given the strong cash flow position of $5 billion/year," they concluded. Like Cramer and Link, I would anticipate a dividend increase to be announced as soon as the January earnings conference.

 

Stock buybacks are what shareholders want company leaders to pursue. As was recently noted in an article at The Wall Street Journal, "Investing in the existing business comes first," said Mike Jackson the CEO of AutoNation (AN).

 

CEO Jackson went on to say, "But you can create a lot of value when you buy stock when there are dislocations in the market." During the past 12 months AutoNation has used almost $750 million to buy back shares of its stock. That, according to the Journal article, reduced the company's outstanding shares by 15%.

 

As the chart below clearly demonstrates, this has boosted the share price and helped its year-over-year quarterly EPS growth.

auto chart

 

According to the company's intuitive Web site AN is the largest automotive retailer in the U.S. Recently the CEO announced that AN will release its financial results for the fourth quarter and year ended Dec. 31 on Thursday, January 31, 2013.

With the dramatic correction in the share price of AN from its $48.56 high on Oct. 19 to currently below $40, it wouldn't surprise analysts if CEO Jackson and the board continue the tradition of buying back the company's shares.

Other publicly traded standouts of the Dow Jones Industrial Average ($INDU) like Intel (INTC) are likely to announce stock buybacks. INTC, which is currently sitting on total cash of $10.5 billion, might be one of them when it releases its earnings report on Jan. 17. This as well as its shift toward mobile devices may boost its share price.

Expect to see publicly traded companies buying back their shares directly in the months ahead. If you happen to own shares before the announcements you're likely to receive something akin to a tax-free dividend in the form of a sudden surge in the stock's price.

Anticipate thoughtfully, do your due diligence and keep your fingers crossed.

At the time of publication the author was long INTC.


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15Comments
Dec 31, 2012 9:21AM
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Marc - I would like you to re-think this article  from another point of view - and write a follow up. If you really do give this some thought I think you may very well come to the conclusion that Stock Buybacks are not necessarily in the Investors best interests. If you come to a different conclusion I would be very interested in knowing why .
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Oh my goodness!  Where is the money for the buyback coming from?  The company.  How does that help the investor holding for long term?  It doesn't...  Only helps those selling the stock for whatever reason.  A buyback is a insider and speculator sell signal.  Tell me something that a buy and hold INVESTOR can use.!
Dec 31, 2012 12:21AM
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Stock buybacks only make sense if the internal rate of return is greater than that of the market as a whole.  Otherwise it is simply a temporary measure of inflating the stock price.  Most of the companies listed here would be better off returning the excess assets to the stockholder in the form of dividends so they can invest in more innovative portions of the market.  Cash cows are expected to produce milk, not get fatter.
Dec 30, 2012 11:45PM
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Stock buybacks have been more popular since top line revenues have been less than stellar for many corporations. This allows the company to give the illusion of more profitability by showing a larger per share profit. In the past corporations didn't have to resort to such tactics, they made money the old fashioned way; they earned it!!
Dec 30, 2012 10:44PM
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I don't mind a company doing buybacks but I agree that this is in no way a dividend. In theory a company buys back its stock when it thinks it is cheap so that if it reissue's it at a later date it makes a profit. I would rather see them raise their dividend to the stock holder or even do a special dividend or as someone said pay down debt.
Dec 30, 2012 3:03PM
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P.S.  I nearly barfed when I saw the article title "Stock Buybacks: Another kind of dividend".  Lets talk about real dividends like KMP or AGNC etc., not pseudo dividends.  I can't believe the author bought into it.
Dec 30, 2012 2:54PM
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"do what you need to do" is spot on the money as are the previous 3 entries.  No buyback ever did benefit a small investor, they are a scam perpetuated by the media talking heads.  As you said they can only benefit corporate top management holding massive positions and options grants.  Only a holder of thousands of shares will possibly benefit and it will be short lived.  What is really the biggest scam is when they use debt to finance the buyback.  The author is not an investor.  Good dividend payers are the way to go for the small guy.
Dec 29, 2012 7:50PM
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Yep; there is usually a small rise in share value after announcing a buyback but let's remember the stock today of these companies has more often than not not recovered from the loses since 2007-2008.  Also, companies don't buy back unless the advantage is for the company NOT the shareholders.  Tell the entire story next time not just the company line.  
Dec 29, 2012 6:07PM
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I agree with isthisreal....stock buybacks only reward Ceo's and top managers, as well as those directors of the company, to cash in stock options at higher prices. It may temporarily affect the stock price, but earnings ultimately drive the stock price.  As a small investor, I look for stocks that pay a dividend, ( 5% or more), and grow earnings. The company makes more money, then they should reward investors with dividends.  A good company that prospers will have a stock that rises as well.  Stock buybacks are a kind of ponzi scheme to help out the top management enrich themselves with the huge stock option grants awarded them from their buddies on the board.

  When the companies need more cash, they no doubt issue more shares on the market, so, what's the point on buybacks?.  Give me the dividends and let the stock ride with the market. I'd rather see a company use excess cash to pay off debt. If no debt, then award it's investors with dividends. STOCK BUYBACKS are a SCAM!

Dec 29, 2012 5:28PM
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Sorry.....Not sure, that is exactly true....Are you an investor ??

Dec 29, 2012 3:16PM
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What a load of BS.

Most stock buy backs are for covering stock options, not to reduce the float.

 

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