By Alex Gavrish, Etalon Investment Research; author of “Wall Street Back To Basics”
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Share buybacks
Recently published article in the Wall Street Journal titled “The Downside to Stock Buybacks” attracted my attention. Although the arguments outlined are, in fact, important points to consider when evaluating the effectiveness of share buybacks, the bottom line and conclusion regarding the “lenses” through which investors should view stock buybacks are wrong. During periods of market declines and increased volatility, investors usually adapt a more sober view of market and valuations. It is exactly during these periods that they should look at companies who take advantage of lower valuation of their stock and repurchase shares on an active basis. Importance of share buybacks is very clear: similar to dividends, it is one of the ways to reward shareholders and return the excess capital. The performance of market indexes that track companies who repurchase shares as well as ETFs proves that share buybacks overall are highly beneficial to shareholders. For example, PowerShare Buyback Achievers Fund (ETF) (NYSEARCA:PKW) is based on an index that is comprised of US securities that have effected a net reduction in shares outstanding of 5% or more in the trailing 12 months. This buyback ETF provided a +135% return over the past 5 years and had significantly outperformed the S&P 500 Index, which returned only +90% over the same period. Index providers and ETFs add or delete companies from the index “retroactively” depending on their buyback activity in the past, usually the last 12 months. More active investors might do well by looking “proactively” for companies that plan to repurchase their shares in the near future. Below are few companies that recently announced buybacks.
National Oilwell Varco
[drizzle]National-Oilwell Varco, Inc. (NYSE:NOV) is a worldwide leader in the design, manufacture and sale of equipment and components used in oil and gas drilling and production operations, and the provision of oilfield services to the upstream oil and gas. On September 30th, 2014, company announced that its Board of Directors authorized a share repurchase program to purchase up to $3 billion of the company’s outstanding common shares. National Oilwell Varco also pays a regular quarterly dividend of $0.46 per share, which currently provides a 2.6% annual dividend yield. Shares declined by 18% over the past two months from their August 2014 high of $86.4 to current $70.8 per share. Company has a $30.4 billion market capitalization, has no net debt, and is currently valued at an EV/EBITDA multiple of x7.6 (based on FY 2013 EBITDA and adjusted for NOW Inc spin-off).
Adidas
Adidas AG (ADR) (OTCMKTS:ADDYY) (ETR:ADS) is a one of the global leaders in the sporting goods industry, with a diverse brand portfolio of footwear, apparel and hardware for sport and lifestyle: adidas, Reebok, TaylorMade and Rockport. On October 1st, 2014, company announced a new plan to return up to EUR 1.5 billion to shareholders over the next three years, primarily through share buybacks. Adidas also confirmed that it intends to pay an annual dividend to shareholders in the range of 20% to 40% of net income. Company paid EUR 1.5 per share dividend for 2013, which currently provides a 2.6% annual dividend yield. Shares declined by 38% during this year from their January 2014 high of EUR 93 to current EUR 58 per share. Company has a EUR 12 billion market capitalization, has almost no net debt, and is currently valued at an EV/EBITDA multiple of x8.2 (based on FY 2013 EBITDA).
Intel
Intel Corporation (NASDAQ:INTC) is a world leader in computing innovation. The company designs and builds the essential technologies that serve as the foundation for the world’s computing devices. In July of 2014, company announced an increase of $20 billion to its share repurchase program. During first 9 months of 2014, Intel spent $7.1 billion on share buybacks. Company also pays a regular quarterly dividend of $0.23 per share, which currently provides a 2.8% annual dividend yield. Company has a $158 billion market capitalization, has no net debt, and is currently valued at an EV/EBITDA multiple of x7.2 (based on FY 2013 EBITDA).
Conclusion
Despite the existence of negative aspects as well as the standard complexities surrounding the investment decision-making process, buyback announcements and actual buyback activity is a fertile ground to identify profitable, high-quality companies. Information about buyback activity is readily available in companies’ regulatory filings and is well covered by the financial media. Many investment and media websites even have separate sections that highlight buyback announcements and the companies involved. Combined with additional analysis, as well as confirmation of a favorable fundamental valuation in place, it is a safe bet that those companies will outperform the market.
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