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'm tracking newly announced share repurchase programs. Today, it's the turn of the plastic money king, Visa (NYSE: V ) .
How much, for how long?
Visa is adding a $1 billion repurchase authorization to its previously announced $1 billion program. The authorization is valid through July 20, 2012, and there are no other restrictions on the program.
How cheap is the stock?
Visa'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 Visa's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, Visa shares trade in the top half of a group of six of its peers:
|
Company
|
Forward P/E
|
| Automatic Data Processing |
18.1
|
| MasterCard (NYSE: MA ) |
17.4
|
| Visa |
15.4
|
| Global Payments |
13.6
|
| American Express (NYSE: AXP ) |
12.1
|
| Western Union (NYSE: WU ) |
10.2
|
| Discover Financial Services |
6.8
|
Source: S&P Capital IQ.
Is this a buy signal?
Visa's price-to-earnings multiple is in the lower half relative to its own five-year history, the middle quintile relative to its industry peers, and the top half relative to the companies in the S&P 500. At 15 times the next 12 months' estimated earnings, the shares look neither particularly cheap, nor particularly rich. Although they are lower quality businesses, I'd be more inclined to look at Western Union or Discover Financial at current prices. If you want to begin following Visa or any of the stocks in the table above, you can track them with our free application, My Watchlist:
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