Companies with buyback programs in place don't always get the attention they deserve. But a company capable of repurchasing its own shares from the marketplace can offer a number of unique investor benefits.
When a company buys back its own stock it decreases the number of its outstanding shares on the market. For the investor, this means that his relative ownership of the stock increases, as there are fewer shares to divide earnings between. And higher earnings per share means higher share price, at least theoretically.
Share repurchases can also boost a company's financial ratios. Buybacks use up excess cash, thereby reducing assets as indicated on the balance sheet. As a result, return of assets is increased, as is return on equity, since there's less of it outstanding. Since the market pays close attention to these metrics, these improvements can be advantageous to investors.
When a company's management team buys back their own stock, they're signaling a pretty strong vote of confidence in their firm. It could be the case that they simply consider themselves to be the very best investment out there.
It could also be an indication that they think the market is undervaluing their company's stock, due to weaker than expected earnings, poor overall economic climate, or any number of other reasons. They should be able to gauge their company's value better than anyone else -- they are after all, the experts, and have access to insider information.
But how do you know if you can trust management teams buying back their own company's stock?
One way to start is to evaluate the management team's track record. If they have outperformed their competitors in the past, it's probably a good indication that they know what they're doing.
Here's our list of the most efficient management teams buying back their own stock. We started with a universe of stocks that have recently announced buybacks, then narrowed it down by focusing on the stocks with the most efficient management teams.
Efficiency is defined according to the following ratios: return on assets, a measure of profitability relative to its total assets; return on equity, revealing profit generated with shareholders' investments; and return on invested capital, which shows how well a company generates cash flow relative to its invested capital.
These management teams think their company's stock is undervalued -- do you agree? (Click here to access free, interactive tools to analyze these ideas.)
Management data sourced from Reuters, buyback data sourced from RTT News. All values based on data collected on Monday morning, January 10, 2011. The list has been sorted by the relative size of the buybacks.
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Company
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Buyback Program
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Management Performance
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Brinker International (NYSE: EAT )
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On 11/10 the company announced an increase in their buyback program of $325M, representing about 16% of their market cap
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5-year avg ROA at 5.82% vs. industry avg at 3.82%. 5-year avg ROI at 7.53% vs. industry avg at 5.12%. 5-year avg ROE at 15.4% vs. industry avg at 9.4%
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Valeant Pharmaceuticals International (NYSE: VRX )
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On 11/4 the company announced an increase in their buyback program of $1.5B, representing about 14% of their market cap
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5-year avg ROA at 10.97% vs. industry avg at 9.94%. 5-year avg ROI at 13.08% vs. industry avg at 12.88%. 5-year avg ROE at 16.75% vs. industry avg at 16.47%
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Aeropostale (NYSE: ARO )
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On 11/15 the company announced an increase in their buyback program of $300M, representing about 13.70% of their market cap
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5-year avg ROA at 24.46% vs. industry avg at 8.76%. 5-year avg ROI at 34.54% vs. industry avg at 13.09%. 5-year avg ROE at 47.03% vs. industry avg at 14.98%
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Obagi Medical Products (Nasdaq: OMPI )
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On 10/26 the company announced a buyback program of $35M, representing about 13.6% of their market cap
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5-year avg ROA at 18.12% vs. industry avg at 9.21%. 5-year avg ROI at 21.88% vs. industry avg at 11.48%. 5-year avg ROE at 36.56% vs. industry avg at 14.94%
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Family Dollar Stores (NYSE: FDO )
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On 9/29 the company announced an increase in their buyback program of $750M, representing about 13.5% of their market cap
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5-year avg ROA at 9.87% vs. industry avg at 6.48%. 5-year avg ROI at 15.88% vs. industry avg at 10.82%. 5-year avg ROE at 20.31% vs. industry avg at 18.48%
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Comtech Telecommunications (Nasdaq: CMTL )
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On 9/23 the company announced a buyback program of $100M, representing about 13% of their market cap
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5-year avg ROA at 8.78% vs. industry avg at 5.93%. 5-year avg ROI at 10.3% vs. industry avg at 8.78%. 5-year avg ROE at 13.78% vs. industry avg at 9.94%
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HB Fuller (NYSE: FUL )
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On 9/30 the company announced a buyback program of $100, representing about 10% of their market cap
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5-year avg ROA at 5.16% vs. industry avg at 3.94%. 5-year avg ROI at 6.73% vs. industry avg at 5.53%. 5-year avg ROE at 10.07% vs. industry avg at 7.04%
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Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research. Note: The numbers on top of items represent the forward P/E ratio, if available.
Kapitall's Eben Esterhuizen and Alicia Sellitti do not own shares of any companies mentioned.
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