I'm highly skeptical about the economic value of most share repurchase programs. To see why, look at the total buyback dollar amount for the companies in the S&P 500, compared with 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. 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 First Horizon National (NYSE: FHN ) .
How much, for how long?
First Horizon's new repurchase authorization is up to $100 million worth of shares to be acquired by the end of August 2012; there are no other restrictions.
How cheap is the stock?
First Horizon's announcement doesn't refer to either price or intrinsic value. That's not a positive, because the relationship between price paid and value is the sole factor that determines whether the share purchases are compounding or destroying shareholder wealth. We have no way of knowing whether management understands that principle (or whether management even cares). Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, First Horizon trades toward the top end compared with four of its peers.
|
Company
|
Forward P/E
|
|
Zions Bancorp (Nasdaq: ZION )
|
11.3
|
|
First Horizon National
|
11.0
|
|
KeyCorp
|
9.1
|
|
Huntington Bancshares (Nasdaq: HBAN )
|
8.4
|
|
Fifth Third Bancorp (Nasdaq: FITB )
|
8.3
|
Source: S&P Capital IQ.
Is this a buy signal?
First Horizon's price-to-earnings multiple is in the bottom half compared with industry peers and compared with the stocks in the S&P 500, and in the middle of its own five-year history. That suggests that the entire industry may be cheap right now (banking isn't exactly the sector du jour). At 11 times the next 12 months' estimated earnings, First Horizon shares looks attractive on a first pass. In fact, all the stocks in the table do, and you can track them with our free application, My Watchlist.
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