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 network infrastructure provider F5 Networks (Nasdaq: FFIV ) .
How much, for how long?
The new repurchase authorization adds $200 million to the $166 million remaining from the program that was authorized in October 2010. There are no other restrictions on the program.
How cheap is the stock?
F5 Networks' announcement contains no reference to price or intrinsic value. That's a red flag because the relationship between price paid and intrinsic value is the only factor that determines whether the share repurchases are compounding or destroying shareholder wealth. How are we to know that F5 Networks' management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, F5 Networks trades at the top end compared with four of its competitors:
|Ciena (Nasdaq: CIEN )||25.4|
|EMC (NYSE: EMC )||15.4|
|Brocade Communications Systems (Nasdaq: BRCD )||10.5|
Source: S&P Capital IQ.
Is this a buy signal?
F5 Networks' price-to-earnings multiple is in the top half relative to its industry peers, the top quintile relative to the companies in the S&P 500, and in the middle quintile of its own five-year history. In that context, and at 24 times the next 12 months' estimated earnings, the shares don't look like any sort of bargain. Of the stocks in the table above, Cisco Systems looks much the more attractive proposition. If you want to follow F5 Networks, Cisco, or any of the stocks in the table, you can track them with our free application, My Watchlist: