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 flash-memory storage company SanDisk (Nasdaq: SNDK ) .
How much, for how long?
The new repurchase authorization is up to $500 million over a period up to five years. There are no other restrictions on the program.
How cheap is the stock?
SanDisk's 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 SanDisk's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, SanDisk trades at the lower end compared to a group of four of its peers:
|
Company
|
Forward P/E
|
|
STEC
|
24.1
|
|
Micron Technology (Nasdaq: MU )
|
23.3
|
|
NVIDIA (Nasdaq: NVDA )
|
12.5
|
|
Advanced Micro Devices (NYSE: AMD )
|
11.2
|
|
SanDisk
|
11.1
|
Source: S&P Capital IQ.
Is this a buy signal?
SanDisk's price-to-earnings multiple is in the bottom half relative to its industry peers and 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 11 times next 12 months' estimated earnings, the shares look cheap, at first glance. Nevertheless, there are no recent insider purchases at market prices for SanDisk to support that notion -- in fact, I couldn't find any at all over the past several years (plenty of stock option exercises, though). If you want to follow SanDisk or any of the stocks in the above table, you can track them with our free application, My Watchlist:
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