Big Names Drive Buyback Trend

9/16/2013


The 4,227 U.S. companies for which we have stock-buyback data combined to sell $212 billion in stock over their last four quarters while repurchasing $465 billion. Sounds good.

Of those 4,227 companies, 68% saw their share counts rise during that four-quarter period, while 26% shrank their share count. Sounds bad.

For an explanation of this dichotomy, see the table below. Among the 444 S&P 500 Index stocks for which we have trailing 12-month repurchase numbers, 60% lowered their share count, accounting for 77% of the market's buybacks.

LARGE COMPANIES DOMINATE BUYBACKS
Based on data for more than 4,200 U.S. companies, the large-caps in the S&P 500 Index account for 88% of all repurchases over the last four quarters. Smaller stocks were less likely to buy back enough shares to reduce the share count.
Total
Stock
Sales
($Bil.)
Total
Stock
Purchases
($Bil.)
Net Stock
Purchases
($Bil.)
Higher
Lower
No. Of
Cos. With
Buyback
Data
S&P 500 Stocks
87
409
322
176
266
444
S&P 1500 Excluding
S&P 500
31
34
4
560
329
890
U.S. Stocks Excluding
S&P 1500
94
22
(72)
2,158
522
2,893
All U.S. Stocks
212
465
254
2,894
1,117
4,227

Of the 1,334 stocks with repurchase data in the S&P MidCap 400 and S&P SmallCap 600 indexes, 55% grew their share counts, versus 45% that lowered. But outside the S&P 1500 Index (which combines the S&P 500, 400, and 600 indexes), the picture is bleak, with net share issuers outnumbering net share purchasers more than 4-to-1.

Going forward, spending on buybacks should continue to rise. Last month Apple ($495; AAPL) pledged to buy back $60 billion by the end of 2015, which Standard & Poor's calls a record. Activist shareholder Carl Icahn is pushing for even more.

Twenty-eight S&P 500 companies have repurchased at least $10 billion in shares over the last five years, net of stock issuance. We cover all 28 of them on our Monitored List (www.DowTheory.com/Go/ML), and you can find seven of them in the table below.

But not all buybacks mean the same thing. Most companies large and small issue new shares over time, either in public offerings to raise funds or for use as employee compensation. Some repurchasers only buy back enough to offset the dilution, and most don't even manage that much.

Outside of the S&P 500 Index, 72% of U.S. stocks saw their share counts rise over the last year, while 51% boosted the share count at least 1% and 37% expanded the share base 3% or more. However, only 21% of S&P 500 stocks raised the share count by at least 1%. In contrast, 48% shrank the share base at least 1%, with 29% reducing the count by 3% or more.

Overall spending on buybacks is on the rise. In the first quarter of 2013, the latest period with complete records, S&P 500 Index companies spent $100 billion on share buybacks, up 19% from the year-earlier quarter. In the 12 months ended in the first quarter, index companies spent $415 billion on buybacks and $287 on dividends, combining to account for 80% of their operating earnings.

In general, we view share repurchases as a positive for investors. Buybacks generous enough to shrink share counts can boost stock prices, as they augment growth of per-share profits and other per-share numbers often used to value stocks. But while buybacks (and share issuance) can affect individual stock prices, S&P 500 buybacks remain well below historical peaks and are unlikely to affect the supply-and-demand balance for the broad market.

Below we review three stocks with aggressive buyback programs.

Lear ($71; LEA) repurchased $1.1 billion of its own shares net of new issuance in the 12 months ended June. During that 12-month period, Lear's share count dipped 15%. The company expects free cash flow of $300 million this year, up 38% from 2012 levels — but that's not the only reason to expect continued repurchases.

During the June quarter, Lear bought back $800 million under an accelerated share repurchase (ASR) program. Lear could buy back more shares under the ASR, slated to end no later than March 2014, and will still have $750 million in buyback authorizations after the end of the ASR. Since Lear started repurchasing in early 2011, its share count has declined 21%.

Global vehicle production rose 3% in the June quarter, powered by gains of 11% in China and 6% in North America. This growth, which featured Europe's first production increase in a year and a half, helped drive Lear to raise its full-year profit expectations in July. The consensus projects roughly flat per-share profits in the second half of the year, followed by a 25% jump in 2014. Lear, with a Quadrix Overall score of 99 and both sector-specific ranks above 98, is a Focus List Buy and a Long-Term Buy.


DirecTV ($61; DTV) cut its share count in half over the last five years, the only company in the S&P 500 to accomplish that feat. The pay-TV provider repurchased nearly $22 billion in shares net of new issuance during the five-year period, including $4.5 billion in the 12 months ended June.

The lower share count augmented growth, with per-share profits up 32% annually over the last five years. But DirecTV is more than a buyback story, with sales rising at an 11% annual clip during the five-year period, and operating profits (16% annually) and cash from operations (9%) also growing strongly. Growth has slowed in recent quarters, with accounting, economic, currency, and competitive problems dragging on the Latin American unit. Still, DirecTV managed sales growth of 8% over the last year. The maturing of the U.S. market limits DirecTV's expansion potential here, but the rise of the middle class in Latin America should help sustain growth.

At 12 times trailing earnings, DirecTV trades at a 31% discount to its peer group and 14% below its own three-year average. After roughly flat per-share profits during the second half of 2013, analysts project a 23% gain in 2014. The stock remains a Focus List Buy and Long-Term Buy.


For the last decade, oil giant Exxon Mobil ($85; XOM) has been the poster child for stock buybacks. During that 10-year period, Exxon spent more than $222 billion on repurchases, reducing its share count by roughly 2.2 billion shares, or 34%.

As impressive as Exxon's repurchase volume is its consistency. In each of the last 40 quarters, Exxon has repurchased at least $1.5 billion in shares net of stock sales, averaging about $5.6 billion. Given Exxon's history and its massive free cash flow (average of $2.76 billion per quarter over the last three years), investors can expect continued repurchases. While Exxon's buybacks and steady dividend growth are positives, the company's lack of production growth could limit sales and profit growth in coming years. Last week we dropped the stock from the Long-Term Buy List. Exxon shares are rated B (average).

BUYBACK LEADERS
The top 12 companies below, all A-rated, have repurchased enough stock to reduce their share count at least 3% over the last year and 10% over the last five years. On average, buybacks have accounted for 59% of these companies' operating cash flow. The dividend-buyback yield represents the the sum of dividends and net buybacks over the last year as a percentage of current stock-market value. Recommended stocks are listed in bold. The bottom table presents B-rated stocks that have bought back more than $30 billion shares over the last five years.
Net Share Buybacks
------ (Millions) ------
Share-Count
----- Change -----
Dividend-
Buyback
Yield,
Trailing
12 Mos.
(%)
Operating Cash Flow
------ (Millions) ------
Free Cash Flow
------ (Millions) ------
Stock-
Market
Value
($Bil.)
Company (Price; Ticker)
Trailing
12 Mos.
($)
Last
5 Yrs.
($)
Trailing
12 Mos.
(%)
Last
5 Yrs.
(%)
Trailing
12 Mos
($)
Last
5 Yrs.
($)
Trailing
12 Mos
($)
Last
5 Yrs.
($)
AutoZone ($420; AZO)
1,200
6,261
(7.7)
(43)
8.0
1,321
5,951
913
4,315
14.9
Bed Bath & Beyond
($72; BBBY)
967
2,879
(6.2)
(16)
6.2
1,193
5,102
884
3,977
15.6
CVS Caremark
($59; CVS)
2,453
9,896
(4.0)
(16)
4.7
5,196
26,438
2,218
12,770
72.7
DirecTV ($61; DTV)
4,528
21,785
(14.4)
(51)
13.6
5,620
25,423
2,098
11,450
33.4
Kroger ($38; KR)
895
3,478
(7.0)
(22)
6.0
3,146
14,958
728
3,325
19.5
Lear ($71; LEA)
1,100
1,500
(15.0)
NM
20.1
835
2,182
274
648
5.8
McKesson ($126; MCK)
1,115
4,914
(3.3)
(18)
4.5
3,751
11,840
3,289
9,871
28.8
St. Jude Medical
($53; STJ)
1,130
3,096
(9.0)
(18)
9.2
1,142
5,726
589
3,557
15.3
TJX Companies
($54; TJX)
1,239
4,929
(3.0)
(18)
4.1
2,549
10,707
1,157
5,664
38.6
Travelers ($83; TRV)
1,163
12,514
(3.0)
(38)
6.1
3,217
15,443
2,498
11,996
30.8
WellPoint ($88; WLP)
1,758
12,735
(8.5)
(42)
8.2
2,382
13,347
1,410
10,063
26.2
Zimmer Holdings
($81; ZMH)
453
3,177
(3.1)
(26)
4.2
1,083
5,525
648
3,772
13.7
The biggest buyers
Exxon Mobil
($88; XOM)
19,888
99,843
(4.8)
(16)
7.9
47,941
234,528
3,144
48,239
386.6
IBM ($187; IBM)
10,859
46,860
(4.5)
(21)
7.2
18,057
97,312
10,615
61,119
204.4
Microsoft ($32; MSFT)
4,429
34,410
0.6
(10)
4.4
28,833
130,563
17,121
88,484
269.8
Wal-Mart Stores
($74; WMT)
8,267
41,383
(3.1)
(17)
5.8
25,247
124,153
6,050
36,348
242.3
NM  Not meaningful.

 


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