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 time to look into medical devices company Intuitive Surgical (Nasdaq: ISRG ) .
How much, for how long?
Intuitive Surgical's new authorization is $500 million, which puts the total current program at $568 million ($68 million is left from the previous authorization in February 2011.) There are no 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 Intuitive Surgical's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, Intuitive Surgical shares trade at the top of a group of four of its peers:
|Edwards Lifesciences (NYSE: EW )||28.2|
|NuVasive (Nasdaq: NUVA )||14.9|
|Boston Scientific (NYSE: BSX )||12.0|
Source: S&P Capital IQ.
Is this a buy signal?
Intuitive Surgical's price-to-earnings multiple is in the middle quintile relative of its own five-year history and the top quintile relative to both its industry peers and to the companies in the S&P 500. At nearly 32 times the next 12 months' estimated earnings, the shares don't look like any kind of bargain, and the company isn't doing shareholders any favors with a buyback program. At current prices, I'd be much more inclined to look at Zimmer Holdings. If you want to follow Intuitive Surgical, Zimmer Holdings, or any of the stocks in the table above, you can track them with our free application, My Watchlist: