I'm highly skeptical about the economic value of most share-repurchase programs. To see why, look at the 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 track individual share-repurchase programs. Today, I'm looking at the new program established by petroleum refiner Tesoro (NYSE: TSO).

How much, for how long?
Tesoro's new share repurchase program allows for the purchase of up to 5 million shares, placing no other restrictions on when the company will buy shares, or in what amounts.

How cheap is the stock?
Tesoro's announcement doesn’t specifically mention the share price as one of factors that will determine their ability to spend their authorization. Unusually, the program is formulated in terms of a target number of shares instead of a dollar amount allocated toward repurchases. There's a reason for that: The company states openly that its objective is to offset the dilutive effect of compensation-related equity grants from prior years. That's a prominent red flag, as it suggests that management lacks proper incentives and regard for shareholders. I'm not sure whether this is a particular problem in the energy industry, but I recently covered another anti-dilutive buyback program at Atmos Energy (NYSE:

It's the relationship between price paid and intrinsic value that will determine whether the share repurchases are compounding or destroying shareholder wealth, not the number of shares outstanding. Just how cheap (or expensive) are the shares right now? Based on its price-to-earnings multiple, Tesoro trades in the middle of a group of five of its competitors:

Company

Forward P/E

NuStar Energy (NYSE: NS)

18.5
Occidental Petroleum (NYSE: OXY)

9.1
Tesoro (NYSE: TS)

5.0
Marathon Petroleum (NYSE: MPC)

4.4
Valero Energy (NYSE: VLO)

4.1
Western Refining (NYSE: WNR)

3.7

Source: S&P Capital IQ.

Is this a smart use of shareholder capital?
Tesoro's price-to-earnings multiple is in the middle of the range relative to the company's industry peers and to its own five-year history, and in the bottom quintile compared with the companies in the S&P 500. With shares at 5 times the next 12 months' estimated earnings, the buyback program looks like a good use of shareholder capital at current prices; in fact, the entire group in the table looks attractive right now. You can track both of them effectively with our free application, My Watchlist.

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