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 ferret out the smart capital allocators and shame those who fritter away shareholder capital, I've begun to track newly announced share repurchase programs. Today, it's the turn of regional bankers People's United Financial (Nasdaq: PBCT ) .
How much, for how long?
During the third quarter, People's United completed its last buyback program, having repurchased 15.8 million shares at an average price of $11.81. The new repurchase authorization is 5% of the shares outstanding, or 18 million shares.
How cheap is the stock?
People's United's announcement explains they will conduct buybacks “at prices and terms acceptable to management.” That's a good sign 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 price-to-earnings, People's United trades at a higher multiple than four of its competitors:
|
Company
|
Forward P/E
|
| People's United Financial (Nasdaq: PBCT ) |
15.5
|
| City National |
11.7
|
| New York Community Bancorp (NYSE: NYB ) |
11.5
|
| Hudson City Bancorp (Nasdaq: HCBK ) |
8.5
|
| First Niagara Financial (Nasdaq: FNFG ) |
8.2
|
Source: S&P Capital IQ.
Is this a buy signal?
Yes, People's United's price-to-earnings multiple is the bottom quintile compared to its own five-year history, but, relative to its industry peers and the companies in the S&P 500, it's in the middle and the top half, respectively. At nearly 16 times the next 12 months' estimated earnings, it doesn't look like a bargain. The other shares listed in the table, on the other hand, are worth a second look; you can track them with our free application, My Watchlist.
Add all the banks in the article to My Watchlist.
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