Stock buybacks are generally considered a bullish signal on Wall Street. They announce management's belief that its stock is cheap, and that its own shares will provide its best return on investment. Like dividends, buybacks also let companies return capital to shareholders.
How buybacks work
Done right, share repurchases will increase earnings per share, so long as profits stay at least at the same level. A company with $1 million in earnings and 1 million shares outstanding will have EPS of $1. Now, if it buys back 250,000 shares, leaving only 750,000 shares outstanding -- and total profits remain $1 million -- its new EPS would be $1.33, or $1 million divided by 750,000.
We're seeking companies that have announced stock buyback programs. Then we'll head over to Motley Fool CAPS to get some insight into the investing community's preferred picks. If companies announce stock buybacks, and CAPS' top investors endorse their future prospects, Fools should take notice.
Here are some of the latest companies to announce share repurchase programs.
|
Company |
Buyback Announcement Date |
Amount of Buyback |
CAPS Rating (out of 5) |
|---|---|---|---|
|
Deere (NYSE:DE) |
5/30/2007 |
20 million shares |
**** |
|
Biogen Idec (NASDAQ:BIIB) |
5/29/2007 |
$3 billion |
*** |
|
Wal-Mart (NYSE:WMT) |
6/1/2007 |
$15 billion |
** |
|
Viacom (NYSE:VIA) |
5/30/2007 |
$4 billion |
**** |
|
Burger King (NYSE:BKC) |
6/1/2007 |
$100 million |
* |
The CAPS advantage
Investors are not as excited by this group of companies as they were with last week's crop, which received better ratings from the more than 29,000 members of CAPS. Wal-Mart, which announced a huge $15 billion buyback program, has earned a thumbs-down from the CAPS crowd as its growth prospects are scaled back. The market, however, liked last week's buyback announcement, along with Wal-Mart's plans to cut back on store expansions. Investors have driven shares up more than 7% since the news broke.
"Nothing runs like a Deere," the lawn care and tractor firm's ads say. The company has proven itself a CAPS favorite, with a steadily rising rating since the beginning of the year. About one-third of the CAPS players who've weighed in are considered All-Stars, consistently outperforming more than 80% of their peers. The overwhelming majority of those top-ranked investors think Deere will continue to outrun the market.
regnig figures: "Any company that can continue to grow profit and raise prices on its products and sell them during a slowdown in its business cycle is definitely best in class - look for profits to pick up once the US housing cycle bottoms out."
Another highly rated CAPS player, MarkBDow, makes this case:
Production of corn alone will increase substantially over the next few years as investors seek to reap the benefits of the governmental push for ethanol production and utilization. Anticipation of profits will result in producers investing in new farming equipment. As more acres of corn are planted, producers of other marketable farm commodities will be able to increase prices because of a resulting relative scarcity. Those farm profits, real or anticipated, will also result in additional investment in new farm equipment. Deere will do very well in this environment.
As bullish as these All-Stars are, their sentitments aren't unanimous. Top-ranked wcwhiner, who is rated more highly than 99.94% of all CAPS players, says:
My going macro thesis is that 'soft landing' includes both the word 'soft' and the word 'landing.' Since machinery has been run up nicely as the first word in the phrase has started sinking into the market's consciousness, I decided to fade a couple names. If there is a risk at current prices, it is of more landing than expected. Reversal plays are always dicey, but I shall want to ride these ideas until I start seeing a renewed upswing in the data (and no, flat nonfarm payroll per population is not a 'renewed upswing').
What's your take? Is this equipment manufacturer ready to continue plowing profits, or will the economy stick the machinery in the mud?
Foolish fallout
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Biogen Idec is a recommendation of Motley Fool Stock Advisor. Wal-Mart is a recommendation of Motley Fool Inside Value.
Fool contributor Rich Duprey owns shares of Wal-Mart, but does not have a financial position in any of the other stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.
