Stock buybacks are generally considered a bullish signal on Wall Street. They announce management's belief that its stock is cheap, and that investing in itself will yield its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.
How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.
We're looking for companies that have announced stock buyback programs; then we'll head over to Motley Fool CAPS to get some insight into what the investing community thinks the best prospects are. If companies announce stock buybacks, and CAPS' top investors endorse their prospects for the future, Fools should take notice.
Here's a list of some of the latest companies to announce share repurchase programs.
|
Company
|
Buyback Announcement Date
|
Amount of Buyback
|
CAPS Rating (out of 5)
|
|
RealNetworks (:RNWK)
|
5/2/2007
|
$100 million
|
**
|
|
Pepsi (:PEP)
|
5/2/2007
|
$8 billion
|
****
|
|
McKesson (NYSE:MCK)
|
5/7/2007
|
$1 billion
|
*****
|
|
CVS Caremark (NYSE:CVS)
|
5/9/2007
|
$5 billion
|
****
|
|
Nokia (NYSE:NOK)
|
5/3/2007
|
380 million shares
|
***
|
Sources: company press releases, Motley Fool CAPS.
The CAPS advantage
Now we'll turn to CAPS, the Fool's collective intelligence service, and see what some of the most Foolish players have to say about these companies.
McKesson is a top-rated stock that announced a $1 billion share buyback. Investors are overwhelmingly united in their belief that the medical supply distributor will trounce the market. Of the more than 100 CAPS investors who have rated the company, only one thinks it will lag.
Back in November, CAPS All-Star dilettantedude provided his case for McKesson:
Three things are driving McKesson: rapid development of new drugs; demographics; and Medicare Part D. ROIC is high, and the company is selling for only half its estimated fair value based on discounted free cash flow. Their transition to a fee-for-service business model, which hurt the [distributors] last year, appears to have been very successful in boosting margins and ROIC, so the reason for the drop in price seems to be behind them.
It's worth noting that since this prophecy was made, MCK is up more than 20%.
Another company in the field of medicine that has garnered top ratings is CVS, which recently completed its merger of pharmacy management leader Caremark. Industry research and analysis firm Netscribes believes the dual nature of its business will be a key driver going forward:
The inorganic growth of the company has continued with the acquisition of 700 stand-alone drugstores of Sav-on and Osco as well as the distribution centre based in California [thereby] increasing its penetration. The company is in the final stages of merging its Pharmacy Business Management (PBM) arm with Caremark the largest PBM in the market. The average household expenditure on pharma products is set to rise with more and more aging [baby boomers] relying on prescription drugs as a first line of defense against diseases. Added to that is the general scenario of a rise in chronic diseases. These factors are acting in favour of the company and will propel the stock to greater heights.
What's your prescription for these companies? Are the bulls on target, or are they injecting hot air?
Foolish fallout
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
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