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 praise smart capital allocators and shame those who fritter away shareholder capital, I've begun to track individual share repurchase programs. Today, I'm looking at the new program established by managed health-care company WellPoint (NYSE: WLP ) .
How much, for how long?
WellPoint increased its share repurchase authorization by $5 billion, which it intends to deploy over a "multi-year period." There are no other restrictions on when the company will buy shares, or in what amounts.
How cheap is the stock?
WellPoint's announcement doesn't specifically mention the share price as one of the factors that will determine its ability to spend its authorization. That's a shame, because the relationship between price paid and intrinsic value will determine whether the share repurchases are compounding or destroying shareholder wealth. Just how cheap (or expensive) are the shares right now? Based on its price-to-earnings multiple, WellPoint trades in the bottom half of a group of five of its competitors:
|
Company
|
Forward P/E
|
|
AMERIGROUP (NYSE: AGP )
|
15.4
|
|
MedcoHealth Solutions (NYSE: MHS )
|
11.5
|
|
UnitedHealth (NYSE: UNH )
|
10.7
|
|
Humana (NYSE: HUM )
|
9.9
|
|
WellPoint
|
9.5
|
|
HealthSpring (NYSE: HS )
|
9.3
|
Source: S&P Capital IQ.
Should you be tracking WellPoint?
WellPoint's price-to-earnings multiple is in the middle of the range relative to the company's industry peers and in the bottom half compared to the companies in the S&P 500 and to its own five-year history. With shares changing hands at 9.2 times next 12 months' estimated earnings, the buyback program looks like a good use of shareholder capital at current prices; in fact, the entire group of stocks in the table looks attractive right now. You can start to track them with our free application, My Watchlist.
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