Kroger: Compounding or Destroying Value?

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:

Sources: Standard & Poor's and Yahoo! Finance.

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 decided to evaluate individual share repurchase programs. Today, I'm looking at the new program established last week by grocery retailer Kroger (NYSE: KR).

How much and for how long?
The new $1 billion share buyback authorization replaces the $213 million remaining from the previous one. Kroger expects to spend that cash over the next 12 months.

How cheap is the stock?
Kroger's buyback announcement specifically mentions the share price as the primary factor that will determine its ability to spend the $1 billion authorization. That's encouraging 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 Kroger shares right now? Based on its price-to-earnings ratio, Kroger trades at the middle of the pack among some of retail's biggest names:

Source: Capital IQ, a division of Standard & Poor's.

Is this a smart use of shareholder capital?
Kroger's price-to-earnings multiple currently lies in the mid-range compared to the company's industry peers and at the bottom of the range of its own five-year history. With shares trading at 11.5 times the earnings-per-share estimate for the next 12 months, the new buyback program looks like a good use of shareholder capital. In fact, I think it's worth adding Kroger to your Watchlist.

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