Aetna: Creating 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 with the average price of the index on a quarterly basis:

Source: Standard & Poor's.

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. 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 by health insurer Aetna (NYSE: AET).

How much, for how long?
Aetna's new buyback authorization allows for the company to buy up to $750 million of shares in addition to the approximately $310 million remaining under the previous authorization. The company is placing no restrictions on when it will buy shares, or in what amounts.

How cheap is the stock?
Aetna's announcement doesn't specifically mention the share price as one of the factors that will determine its ability to spend its authorization. That's a shame, 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 the shares right now? Based on its price-to-earnings ratio, Aetna trades toward the top of the pack with regard to four of its major peers:

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

Is this a smart use of shareholder capital?
Aetna's price-to-earnings multiple lies in the bottom quintile compared with all companies in the S&P 500 and to its own five-year history, and in the bottom half of the range compared with its industry group. With shares trading at 8.7 times its earnings-per-share estimate for the next 12 months, the share-buyback program looks like a good use of shareholder capital at these prices. In fact, the whole group in the table looks pretty attractive -- it's worth tracking their shares, and you can do that with our free application, My Watchlist.