3 Companies Betting Big on Themselves

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A company's move to buy back substantial amounts of its own stock can create a lot of value for long-term shareholders. Apple (NASDAQ: AAPL  ) , Viacom (NASDAQ: VIAB  ) , and Yahoo! are doing just that, which will aid earnings-per-share growth by lowering the outstanding share count. Companies that bet heavily on their own stock tend to be good investments, as management -- which very likely has better information about the operation than outside investors -- is showing confidence in the organization.

Leading investors favor buybacks over cash dividends, due to their tax-advantaged status. Warren Buffett stated the following in his 1984 annual report:

When companies with outstanding businesses and comfortable financial positions find their shares selling far below intrinsic value in the marketplace, no alternative action can benefit shareholders as surely as repurchases.

Apple uses its massive cash balance
Apple's (NASDAQ: AAPL  ) shares have been depressed for a while now, and the stock price took another hit when the company declared earnings last quarter. In the last quarter, Apple bought $5 billion of stock at an average price of $523.51 per share. The tech giant still had $32.1 billion left from its massive $60 billion share repurchase program at the end of the December quarter. So Apple will  eventually buy back close to 7% of its outstanding shares based on its market cap of $475 billion.

CEO Tim Cook has stated on numerous occasions that he believes that Apple stock is undervalued. He told The Wall Street Journal that his company bought $14 billion worth of stock in two weeks after Apple's stock price dipped after quarterly results. As the company's current share repurchase authorization is used up, Apple will almost certainly increase its buyback program.

The company is trying to grow its user base in large, underpenetrated markets such as China. Apple's management team has stated that it has great products in their pipeline; if that is the case, Apple will generate a lot of value for shareholders down the road. Buying a lot of stock at a reasonably cheap valuation will give its earnings per share a healthy boost. 

Yahoo! is creating value through buybacks
Internet heavyweight Yahoo! has been doing a great job of ramping up its user base to more than 800 million users, including 400 million mobile users. But monetization of its various Internet properties has been lackluster. Yahoo! has put the cash it received from its partial sale of Alibaba shares to good use, repurchasing more than $5.5 billion worth of stock in the last two years and dramatically bringing down its outstanding share count. 

In the most recent earnings call, Yahoo! disclosed that its management authorized another $5 billion in stock buybacks. Once Yahoo! manages to close the gap between users and monetization, and Alibaba hits the public equity markets, the company's fundamentals will improve significantly from current levels. Yahoo!'s plan to buy back roughly 13% of its outstanding shares will boost earnings per share going forward and drive the stock price higher.

Viacom is rapidly reducing share count
Last year, media and entertainment giant Viacom  (NASDAQ: VIAB  ) announced that it would increase its stock buyback program from $10 billion to $20 billion. After its last earnings report, $8.9 billion of that repurchase program remains, which amounts 23% of the company's market cap. Viacom 10Q

Viacom's diluted EPS grew 30% in the last quarter, driven by a combination of organic earnings growth and the impact of its large share repurchase program. The company's major earnings driver is the media networks business which makes up almost 80% of its revenue. The media segment made up all of Viacom's operating income in the last quarter, as the company's filmed entertainment business suffered a loss.

The company controlled by media mogul Sumner Redstone has been creating compelling TV and film content for a long time. Its popular media networks, including MTV, VH1, Nickelodeon, and Comedy Central, reach more than 700 million households in more than 160 countries. Viacom does have a durable competitive advantage as a result of its widespread reach, strong content, and growing earnings power. Its share repurchase program will bolster its EPS substantially, and propel the stock price higher as a result.

The takeaway
Companies that have stellar competitive positions and adequate financial resources can generate a lot of value for shareholders by buying back their own stock. But companies that repurchase their own shares at very high prices destroy a lot of shareholder value. So buybacks should be analyzed carefully before being a part of an investor's thesis.

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  • Report this Comment On March 14, 2014, at 7:06 AM, fauxscot wrote:

    Apple has proven that it's smarter than the competition repeatedly. It has also been smarter than its customers, surprising the world now and then with something it needed but did not imagine.

    Now, it's smarter than the market. That's not a surprise, since the market doesn't run on brains, but instead, on emotions. It's like a drunken teenager sprinting at a shiny object and unable to concentrate. I love reading the blogs that scream "Apple is toast" or "Cook must go" or "What Apple needs is..." and considering that the writers are sitting behind screens for the most part, actually DOING nothing, while Apple is out there making stuff, selling stuff, improving stuff, inventing stuff and now, being smart enough to do what the market and bloggers are too stoooopid to do... buying all the AAPL they can at bargain prices.

    Buffet is right. This is what smart looks like.

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