I'm highly skeptical about the economic value of most share repurchase programs. To see why, look at the following graph of the total buyback dollar amount for the companies in the S&P 500, compared to the average price of the index on a quarterly basis:

Editorial

Source: Standard & Poor's.

Share buybacks for the S&P 500 accelerated in the second half of 2004, culminating in a sharp spike during the first two quarters of 2007 -- just as the stock market was peaking. Conversely, when stocks traded at bargain prices during the worst of the crisis, share buybacks dried up. Then, as stocks became more expensive during the rally that began in March 2009, companies once more became happy to step up the dollar amounts spent on share repurchases.

Still, not all buyback programs hurt shareholders. In order to praise smart capital allocators and shame those who fritter away shareholder capital, I've decided to evaluate individual share repurchase programs. Today, I'm looking at the new program established by defense contractor Raytheon (NYSE: RTN).

How much, for how long?
Raytheon is increasing the $2 billion buyback program announced in March 2010 by another $2 billion. The company is placing no restrictions on when it will buy shares, or in what amounts.

How cheap is the stock?
Raytheon's announcement doesn't specifically mention the share price as one of factors that will determine their ability to spend their authorization. That's a shame because the relationship between price paid and intrinsic value will determine whether the share repurchases are compounding or destroying shareholder wealth. Just how cheap (or expensive) are the shares right now? Based on its price-to-earnings ratio, Raytheon trades toward the bottom of the pack with regard to four of its peers:

Company

Forward P/E

Boeing (NYSE: BA)

13.0

United Technologies (NYSE: UTX)

12.5

Northrop Grumman (NYSE: NOC)

7.6

Raytheon

7.6

L-3 Communications (NYSE: LLL)

7.1

Source: Capital IQ, a division of Standard & Poor's.

Is this a smart use of shareholder capital?
Raytheon's price-to-earnings multiple lies in the bottom half compared with the companies in the S&P 500 and to its own five-year history, and in the middle of the range compared with its industry peers. With shares trading at 7.6 times its earnings-per-share estimate for the next 12 months, the share buyback program looks like a good use of shareholder capital at these prices. In fact, all of the companies in the above table look pretty attractive -- it's worth tracking their shares and you can do that with our free application, My Watchlist.

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