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 they spent on share repurchases.
Still, not all buyback programs hurt shareholders. To ferret out the smart capital allocators and shame those who fritter away shareholder capital, I've begun to track newly announced share-repurchase programs. Today, it's the turn of beverage company Hansen Natural
How much, for how long?
The new repurchase authorization is $250 million. The previous $200 million program, instituted in March 2010, has been entirely spent.
How cheap is the stock?
Hansen's announcement contains no reference to price or intrinsic value. In fact, it contains no mention of any terms whatsoever beyond the amount, not even the catch-all "depending on market conditions and other factors." That's a red flag, because the relationship between price paid and intrinsic value is the sole factor that determines whether the share repurchases are compounding or destroying shareholder wealth. How are we to know that Hansen's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, Hansen trades at the top end compared with a group of four of its major competitors:
Green Mountain Coffee Roasters
|Dr Pepper Snapple Group||13.6|
Source: S&P Capital IQ.
Is this a buy signal?
Hansen's price-to-earnings multiple is in top quintile relative to its industry peers and to the companies in the S&P 500. It's also in the top half of its own five-year history. In that context, and at 25 times the next 12 months' estimated earnings, this isn't the time to be buying Hansen shares. The shares of the "old-school" beverage companies in the table (Coca-Cola, Dr Pepper Snapple and PepsiCo) look a lot more palatable, particularly PepsiCo's. You can track these shares with our free application, My Watchlist.
- Add PepsiCo to My Watchlist.
- Add The Coca-Cola to My Watchlist.
- Add Dr Pepper Snapple Group to My Watchlist.
- Add Hansen Natural to My Watchlist.
- Add Green Mountain Coffee Roasters to My Watchlist.
Add all the companies to My Watchlist