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:
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. 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 by defense contractor Lockheed Martin (NYSE: LMT).
How much, for how long?
The $2.5 billion increase in Lockheed's share buyback authorization replaces an interim $1 billion increase announced on Aug. 23. The original $3 billion buyback program was initiated in October 2010. The company is placing no restrictions on when it will buy shares, or in what amounts.
How cheap is the stock?
Lockheed Martin'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, Lockheed Martin trades at the bottom of the pack with regard to four of its peers:
|
Company |
Forward P/E |
|---|---|
| Boeing (NYSE: BA) | 13.0 |
| United Technologies (NYSE: UTX) | 12.5 |
| Textron (NYSE: TXT) | 11.6 |
| Lockheed Martin | 9.3 |
| General Dynamics (NYSE: GD) | 7.7 |
Source: Capital IQ, a division of Standard & Poor's.
Is this a smart use of shareholder capital?
Lockheed Martin's price-to-earnings multiple lies in the bottom quintile compared to the company's industry peers and its own five-year history, and in the middle of the range compared to all companies in the S&P 500. With shares trading at 9.3 times its earnings-per-share estimate for the next 12 months, the share buyback program looks like an acceptable use of shareholder capital at these prices, but Lockheed competitor General Dynamics is more interesting. It's worth tracking the shares of both, and you can do that with our free application, My Watchlist.
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