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 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 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.
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.
More from TheStreet.com
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!
What a load of BS.
Most stock buy backs are for covering stock options, not to reduce the float.
Sorry.....Not sure, that is exactly true....Are you an investor ??
Copyright © 2014 Microsoft. All rights reserved.
Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.
New study finds members of this global elite are stashing an average $600 million each in cash -- 10 times more than a year ago.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.