Herbalife Ltd. (NYSE:HLF) is following up its excellent earnings report for 1Q 14 with another, very shareholder friendly move.

The company’s decision to cancel two years’ worth of dividends and use the cash saved of about $216 million in share buybacks during May and June, could result in an aggregate buyback bonanza for shareholders of over $500 million during Q2.

Buybacks in lieu of dividends

Barclays analysts Meredith Adler and Sean Kras, in their April 29, 2014 research note on Herbalife Ltd. (NYSE:HLF) call the decision to replace future dividends with current buybacks an “interesting step.”

“Clearly, this is a sign of the financial health of the business, as well as an indication that the company views its shares as undervalued,” say the authors. “By converting the dividend to a near-term share buyback, the company accelerates the pace at which it returns cash to shareholders.”

According to Barclays, the move was possible because of excellent business cash flows out of which a war chest of approximately $667 million is already positioned within US shores.

Taking an aggregate view of buybacks already implemented, Barclays anticipates that the company could end up the purchasing $ 581 million of stock during the second quarter 2014.

Marketing model shift

“HLF has shifted its business model from selling bulk orders sporadically to selling smaller ones more frequently,” observe the analysts. “This shift has driven significant growth and we expect this momentum to continue.”

During the first quarter, US and Canadian revenues grew by nearly 12%, and strong growth was also witnessed in most other countries, says the report.

In fact, in the South and Central American region, Herbalife Ltd. (NYSE:HLF) sales grew over 11% despite the hit from Venezuelan operations. Excluding Venezuela, the region grew over 19%.

New EPS projections

Barclays have revised EPS projections, taking into account updated guidance and share buybacks, as follows.

Herbalife

FTC investigation: The fly in the ointment?

Barclays do not appear to be unduly perturbed with the ongoing FTC investigation.

During their conversations with the company, the analysts were given to understand that at some point the FTC would provide closure to its investigation through the means of a closeout letter, even though there is no clarity as yet on how long the investigations could take.

If such a closeout letter is received, the company would doubtless post the same on its website. “Although there is still no information about the progress of the investigation, any potential resolution or the timing of it, we believe that knowing there will be a real end to the issues is important,” says the research note.

In addition, the research note observes that investigations in other states would likely follow the lead of the FTC.

Herbalife Rating

Barclays maintain their Overweight rating on Herbalife Ltd. (NYSE:HLF) with an unchanged price target of $ 94.00.

2-scenarios