Investors like it when a company whose shares they own announces a stock buyback program. Whether it's a new program or an expansion of an existing plan, stocks of companies often get bid up when they announce share-repurchase programs.
In our "Shrink!" column, we track companies that announce share-repurchase programs, along with investor sentiment as revealed by Motley Fool CAPS, our new collective-intelligence community. If companies are bullish about their own prospects and the smartest investors in Fooldom concur, then that ought to get your attention.
Background on buybacks
We're tracking buyback programs because they can be a powerful driver to earnings-per-share growth. For instance, say a company with $1 million in earnings has 1 million shares outstanding and earnings of $1 per share. If it buys back 250,000 shares so that only 750,000 shares remain outstanding -- and total profits are still $1 million -- then its new EPS will be $1.33 (because 1 million divided by 750,000 is 1.33). This company increases its EPS by 33% without doing anything more than buying back its shares. When we couple that with increased profitability, we see that EPS can really move up in a hurry.
By itself, tracking buybacks can give you some good investment ideas. But if you combine that knowledge with the opinions of 26,000 CAPS investors, you might be able to identify truly outstanding potential investments.
Follow through
Today, we're checking whether those companies that announced share-buyback programs are following through on their promise. Just because a company announces a buyback, that doesn't mean it actually has to repurchase any.
That may be for a couple of reasons -- some good, some bad. Companies know, just as we do, that the markets like a buyback announcement. Sometimes, they'll say they're going to buy back shares just to prop up the price of their stock. That would obviously be one of the bad reasons.
Other times, after an announcement, the share price goes up, and management doesn't think that buying back stock is the best use of its money. The stock is no longer undervalued, so they wouldn't be getting the best return on their money. That would be a good reason not to buy back shares.
Here's a list of companies that announced buyback programs and what's happened since. We also check in with Motley Fool CAPS to see how investors feel.
|
Company |
Buyback Announce-ment Date |
Change in Shares Outstanding |
Change in Share Price |
Chg in TTM EPS |
CAPS Rating (5 Stars Maximum) |
|---|---|---|---|---|---|
|
MTC Technologies (NASDAQ:MTCT) |
10/27/2006 |
(1.92%) |
(12.02%) |
(8.46%) |
** |
|
Cardinal Health (NYSE:CAH) |
8/3/2006 |
(2.63%) |
11.17% |
51.50% |
*** |
|
Goodrich (NYSE:GR) |
10/24/2006 |
0.71% |
23.30% |
5.83% |
**** |
|
Genworth Financial (NYSE:GNW) |
10/26/2007 |
0.11% |
(3.05%) |
6.39% |
**** |
|
American Greetings (NYSE:AM) |
10/26/2006 |
3.04% |
(3.20%) |
61.96% |
* |
While it looks as though some of the companies are starting to follow through on their commitment, we also see that a few have also enjoyed stock-price appreciation. Goodrich in particular saw its stock rise by more than 23% since it announced its buyback program, primarily because it has been hitting operational performance, justifying its four-star rating over at CAPS.
Here's what CAPS players are saying about Goodrich and the others:
All-Star sandvig says, "The commercial air carriers are faced with an aging fleet. It stands to reason that the cost of maintaining such a fleet works to the advantage of those who supply necessary parts. Boeing has a significant backlog of orders. When planes come on line from production, that should work to the advantage of GR as well. On balance, I think the next few years will be good ones for GR."
Another CAPS All-Star, scocra, notes that "if GR can perform well on both the A350 and 787 programs it will be very well situated to claim a large portion of the A320 / 737 replacement programs. Ideally, GR will also be able to grow its military business to gain some distance from the cyclical nature of commercial aerospace."
Spooky27, who ranks better than 96% of all other CAPS players, thinks that Cardinal Health is a winner, too. "This is a good solid company and I believe with the new management team this company is going to do well plus the sector is good. Who needs health care? WE ALL DO! That's what makes this so great -- there is so much potential here for growth."
Foolish final thoughts
Now it's your turn to weigh in with your opinion on the stocks in the list, or any stock for that matter, on Motley Fool CAPS.
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Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
