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 enterprise software giant Oracle (Nasdaq: ORCL ) .
How much, for how long?
Oracle's new repurchase authorization is up to an additional $5 billion, with no other restrictions on the program.
How cheap is the stock?
The buyback 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 Oracle management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, Oracle shares trade in the middle of a group of four well-known peers:
|
Company
|
Forward P/E
|
| salesforce.com (NYSE: CRM ) |
63.2
|
| IBM (NYSE: IBM ) |
12.7
|
| Oracle |
10.6
|
| Microsoft |
9.2
|
| Hewlett-Packard (NYSE: HPQ ) |
6.2
|
Source: S&P Capital IQ
Is this a buy signal?
Oracle's price-to-earnings multiple is in the bottom quintile relative to its own five-year history and in the bottom half relative to both its industry peers and to the companies in the S&P 500. At less than 11 times next 12 months' estimated earnings, the shares look like a good bargain and share repurchases at current levels will enhance shareholder value. In fact, all of the companies in the table above, barring Salesforce, look attractive; if you want to track one or all of them, you can easily do so with our free application, My Watchlist:
Add these companies to My Watchlist.
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