Stock buybacks are generally considered a bullish signal on Wall Street. They return capital to shareholders, while declaring management's belief that its own cheap shares are its best return on investment. As long as profits remain consistent, share repurchases can even increase earnings per share, by dividing the same amount of earnings among a smaller pool of shares outstanding.
Today, we'll find a few companies that announced new or expanded stock buyback programs, then consult Motley Fool CAPS to see which of those firms the 180,000-strong investor community favors most. If CAPS' top investors endorse the prospects of companies announcing buybacks, maybe Fools should take notice.
Here are two of the latest companies to announce share repurchase programs over the past month:
CAPS Rating (out of 5)
New or Expanded
|KeyCorp (NYSE: KEY )||**||$344 million||New|
|Krispy Kreme Doughnuts (NYSE: KKD )||*||$20 million||New|
But don't forget, Fools -- a company isn't obligated to repurchase shares just because it announced its intention to do so. So don't use this list as a reason to buy by itself. Instead, use it as a launching pad for additional research.
Key to growth
Preening like peacocks, banks that passed the latest round of stress tests began hiking dividends and buying back shares. Those that failed like Citigroup (NYSE: C ) are prohibited from doing so, so it's a bit of bragging rights here that JPMorgan Chase announced it was hiking its payout. But not all did so.
Bank of America (NYSE: BAC ) was embarrassed last year after being denied after requesting an increase, so it announced ahead of time it wouldn't be asking for one again. And while KeyCorp also passed the stress test, it announced it was only initiating a share repurchase program, but would look at the feasibility of raising its dividend to $0.05 a share, a 67% hike if it moves forward.
Yet KeyCorp is right to be reticent. While fourth-quarter results came in slightly better than analyst expectations after adjusting for losses related to Visa, and loans grew 13% year over year, net charge-offs were higher than anticipated (though down slightly from last year) and management said it would be releasing fewer loss reserves going forward -- meaning it might have less flexibility.
As the financial services sector continues to improve, KeyCorp will likely improve, too, and come the annual shareholder meeting in May I wouldn't be surprised to see the company announce a dividend increase, too. But it's not out of the woods, and while announcing a buyback and implementing it are two different things, spewing forth so much cash as a dividend hike has me worried it will falter.
I'm sure that's part of the reason why 30% of the CAPS members rating KeyCorp see it underperforming the market indexes. Add the bank to your watchlist and let me know in the comments section below or on the KeyCorp CAPS page if you'd deposit your money in this stock.
A slam dunk?
Doughnut maker Krispy Kreme Doughnuts has known stressful times of its own in the past, but it isn't the same company it was back then when it was larded with debt. Today its debt-to-equity ratio is very low at 0.11, suggesting management is attuned to the concerns of burdening itself again.
While earnings growth rates slowed in the last quarter, they were also better than expectations and ahead of last year's effort. Krispy Kreme is flexing new muscles and is willing to challenge both McDonald's (NYSE: MCD ) and Starbucks by wanting to triple its coffee sales over the next three years from 4% of sales to 12%. Currently, it gets 80% of its sales from selling krullers, Boston Kremes, and jelly doughnuts, but coffee is hot these days and nothing goes better with a cup of joe, explaining Dunkin Brands' own push with its coffees.
Investors have long memories, though, and Krispy Kreme remains a low-rated stock on CAPS where just 52% think it can keep beating the Street. As Motley Fool blogger Chad Henage points out, it will be tough for the doughnut maker to shake its identity as... a doughnut maker.
The biggest challenge that Krispy Kreme faces, is the fact that the company is mainly seen as a doughnut maker. The company needs to understand that it must expand not only its drink selection, but also its food selection. In short, Krispy Kreme needs to take a page from both Dunkin' Donuts and Starbucks.
Indeed, Starbucks justly or not is associated with high-priced coffee even though it has cheaper fare and a variety of food and McDonald's is still primarily a burger joint. Variations far beyond those confines have typically not gone so well. But doughnuts and coffee aren't such a stretch, so add Krispy Kreme to the Fool's free portfolio tracker to keep track of future news.
While McDonald's has transcended many traditional categories, it has also been highlighted as one of the "3 American Companies Set to Dominate the World." You can learn about the other two right here.