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:
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 begun to track individual share repurchase programs. Today, I'm looking at the new program established by purification and filtration products manufacturer Pall (NYSE: PLL ) .
How much, for how long?
Pall increased its share repurchase authorization by $250 million, on top of roughly $200 million remaining from the previous authorization. In line with fiscal year 2011 (which ended on July 31), the company expects to purchase some $150 million of shares in fiscal 2012.
How cheap is the stock?
Pall's announcement doesn't specifically mention the share price as one of the factors that will determine its ability to spend its authorization. That's a shame, because the relationship between price paid and intrinsic value will determine whether the share repurchases are creating or destroying shareholder wealth. Just how cheap (or expensive) are the shares right now? Based on its price-to-earnings multiple, Pall trades at the top of a group of six of its competitors:
|
Company
|
Forward P/E
|
|
Pall
|
14.7
|
|
Pentair (NYSE: PNR )
|
12.9
|
|
Lincoln Electric Holdings (Nasdaq: LECO )
|
12.4
|
|
Tyco International (NYSE: TYC )
|
12.2
|
|
SPX (NYSE: SPW )
|
9.7
|
|
Flowserve (NYSE: FLS )
|
9.7
|
|
Parker Hannifin (NYSE: PH )
|
9.3
|
Source: S&P Capital IQ.
Is this a good use of shareholder capital?
Looking more broadly, Pall's price-to-earnings multiple is in the top half of the range relative to the company's industry peers and the companies in the S&P 500 and in the bottom half compared to its own five-year history. With shares changing hands at nearly 15 times the next 12 months' estimated earnings, the buyback program looks like a poor use of shareholder capital at current prices; in fact, with the possible exception of Parker Hannifin, none of the stocks in the table look particularly attractive. That could change, of course -- particularly in this volatile market. You can track these stocks with our free application, My Watchlist.
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