Coca-Cola Enterprises, which produces, distributes, and markets beverages in Western Europe, is already three-quarters through an earlier $1 billion authorization that was initiated at the end of last fiscal year.
By next year, CCE plans to start the new $1 billion buyback, with plans to complete at least half of that authorization during the year. For a company that sports a market capitalization of slightly more than $8 billion, a $1 billion buyback is certainly substantial. Planning a buyback is all well and good, but first we need to see whether CCE has the funds to finance the buyback before trying to understand the rationale behind it.
Is the money fizzing?
Although the company has $676.4 million in free cash flow, it has assumed heavy debt in the past 12 months. Total debt has risen half a billion dollars to $2.8 billion. However, the company has a high interest coverage ratio of 13 times, which means it would really not be problematic for CCE to square off its short-term obligations. Thus, the company shouldn't really have any issues in financing the buyback.
What's its value?
Why does the company want to buy back its shares? Let's take a look at how the company is valued when compared to industry peers to see if we can discover something.
Source: Capital IQ, a division of Standard & Poor's.
Coca-Cola Enterprises' P/E tells us that the stock is slightly cheaper than its peers. Since October last year, the stock price has fallen by more than 16%, which has probably resulted in the slightly lower P/E. Thus CCE may just be using the buyback to help the value of the stock.
Buybacks normally help increase earnings per share and, in the process, increase shareholder value. It might also help increase shareholder confidence. If nothing else, the buyback is a smart strategy to push the value of the stock.
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Shubh Datta doesn't own any shares in the companies mentioned above. The Motley Fool owns shares of Coca-Cola and PepsiCo. Motley Fool newsletter services have recommended buying shares of Coca-Cola, Coca-Cola Hellenic Bottling, and PepsiCo. Motley Fool newsletter services have recommended creating a diagonal call position in PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.