"By year end we will have returned approximately $6 billion to shareholders through repurchases and dividends."
-- Corning CFO Tony Tripeny
And believe it or not, Corning (NYSE:GLW) is just getting warmed up. Earlier this month, the biggest name in LCD flat-screen glass announced plans to return a further $4 billion to its shareholders via new stock repurchases.
Although management hedged that the "actual number of shares that are repurchased will depend on a variety of factors, including general business and market conditions," it put no time limit on when the repurchase authorization will cease. Rather, this is an open-ended commitment to buy back shares whenever the price is right. It also promises to reduce Corning's share count by 17% and concentrate the company's profits among fewer shares outstanding.
Of course, this does raise two questions for us:
Can Corning pay?
Does Corning actually have the cash it needs to make good on its repurchase commitment? In fact, it does.
According to data from S&P Global Market Intelligence, Corning is carrying $3.9 billion in debt on its books. To service that debt, the company probably wants to keep at least some cash on hand. But even so, Corning boasts $4.8 billion in cash and short-term investments on its balance sheet. In theory at least, the company could make good on the entire $4 billion buyback commitment today, if it so desired.
Should Corning pay?
That said, if Corning did drain its cash reserves to make an immediate large repurchase of stock, it would probably want to begin filling up the tank with more cash immediately thereafter, to ensure it can make debt payments as they come due. This could prove a problem for Corning.
You see, while from one perspective Corning is doing pretty well financially, reporting net income of $2.3 billion over the past 12 months, from another perspective, things don't look so rosy. S&P Global figures show that, over the same time period in which Corning was reporting in excess of $2.3 billion in profits under GAAP accounting standards, its actual free cash flow was a mere $933 million. That's down 40% from fiscal 2015 cash production and nearly 75% from 2014 levels.
Why is Corning generating so little cash -- barely $0.40 on the dollar versus reported earnings? Investment isn't the answer. Capital spending levels have held pretty steady over the past four years, so it's not a surge in investment (which might result in a surge in profits in years to come) that's draining cash levels today. Rather, cash from operations simply seems to be in a funk -- and that suggests that Corning might actually want to be a bit cautious about spending too much of its cash on buybacks right now.
The upshot for investors
With Corning stock trading at just 10 times reported earnings today, you might think now is a great time for management to be picking up a few of its own shares on the cheap. You might even be inclined to do the same thing, yourself. But be warned.
Valued on earnings alone, Corning's P/E ratio of 10 looks like a bargain, but valued on free cash flow, the stock sells for a worrisomely high P/FCF ratio of nearly 25. Moreover, analysts are predicting just 5% profit growth for Corning stock over the next five years. And whether you value Corning on earnings or free cash flow, a slow growth rate tends to make both of those ratios look mighty expensive.
The upshot: Caveat investor. Corning shares are not as cheap as they seem.