Newell Brands (NASDAQ:NWL) is quickly becoming the textbook case of a failed merger. After acquiring Jarden Brands in 2015, the combined company failed to come together as a cohesive unit and many of the synergies never materialized. The result was an acrimonious public dispute between the founder of Jarden and Newell's CEO, with both men working with activist investors to consolidate control.
The most-damning stat is the combined company is now valued at just $12.7 billion. That's less than the $15.4 billion (fully diluted) it paid for Jarden and 42% less than the combined $22 billion market cap of the two companies prior to the acquisition. However, while most investors are noticeably bearish on the company, it has one noteworthy buyer: itself.
Newell Brands buyback is huge, relatively speaking
Seeking to take advantage of the negative sentiment, Newell Brands announced a massive share buyback. In addition to the $1.1 billion remaining on the prior authorization, Newell authorized an additional $2.5 billion for buybacks.
While this may not seem massive when major tech companies are announcing $100 billion buybacks, Newell's total $3.6 billion in repurchase capacity is relatively huge. It amounts to about 28% of its market cap.
As a comparison, Apple has returned approximately $200 billion in buybacks since fiscal year 2012 with an additional $100 billion authorized. The $300 billion total is approximately 30% of its current market cap, a figure similar to Newell's total. The difference is that Newell has authorized the buyback and has the ability to execute quickly, not over six years as with Apple.
Wasteful mistake or brilliant move?
Although share repurchases have noticeably increased in recent years, their efficacy has been called into question. Many companies are terrible at buyback timing, buying more shares when they're overvalued, which is essentially wasted money. IBM is often considered the posterchild for wasteful buybacks.
Others fault buybacks for less capital investment and note that they tend to be better for corporate insiders than the investing public writ large. Recently, the SEC announced a disturbing pattern of corporate executives selling their shares soon after buyback announcements, looking to benefit from the inevitable stock price increase from short-term traders.
However, a well-timed buyback program can add billions of dollars in incremental value by lowering shares outstanding and increasing earnings per share. Home Depot stock has increased 162% in the last five years with only a 35% increase in revenue. Stock buybacks have helped Home Depot increased its earnings per share by a whopping 143%.
Newell's relatively cheap, but a buyback could be ill-advised
It's likely that Newell doesn't have to worry about overpaying for its stock as its shares appear cheap when compared to the overall market. Currently, shares yield 3.5%, nearly twice the yield of the S&P 500. Trading at about nine times consensus forward earnings, the company is valued at half the S&P 500's 17.3 forward multiple.
However, earnings estimates are subject to change for Newell, and possibly quickly, as the company is looking at selling certain non-performing assets under its Accelerated Transition Plan to fund both repurchases and debt. While the Jarden acquisition may have been ill-advised, the company's Accelerated Transition Plan appears equally haste-worthy with the company reviewing at least 10 of its brands to fund these sales.
Further encouraging skepticism is the fact that the company has both Carl Icahn from Icahn Enterprises and Starboard Value on its board, as activist investors, specifically Icahn, often push for short-term value extraction over long-term success. However, Starboard has written a detailed plan that appears to focus on long-term operational improvement more than asset sales and cash return.
Rolling the dice
Newell continues to suffer from negative perceptions, but management appears to think the company is undervalued. Income-oriented investors with a higher-risk profile should keep the stock on their radar, watching the company's operations and margin profile carefully. While the buyback is massive, ultimately the company will need to show operational improvement to reward long-term investors.