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: S&P Capital IQ.
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 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 Itron
How much, for how long?
Itron's new repurchase authorization is up to $100 million worth of shares to be acquired over the next 12 months; there are no other restrictions.
How cheap is the stock?
Itron's announcement contains no reference to price or intrinsic value (although CEO Leroy Nosbaum does refer to being "opportunistic in repurchasing shares"). That's unfortunate since the relationship between price paid and intrinsic value is the only thing that determines whether the share repurchases are compounding or destroying shareholder wealth. How are we to know that Itron's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price to earnings, Itron trades at the bottom in a group with four of its peers:
MEMC Electronic Materials
Source: S&P Capital IQ.
Is this a buy signal?
Itron's price-to-earnings multiple is in the top half, in the bottom quintile compared to all companies in the S&P 500 and against its own five-year history, and in the bottom half compared to its industry peers. On that basis, and at less than 10 times 12 months' estimated earnings, the shares certainly look cheap. The CEO appears to believe they are, going by his purchase of 27,000 shares on Friday at an average price of $37.31 (Emerson Electric, a very profitable business, also looks reasonably priced at a P/E of 14). If you'd like to track Itron, Emerson Electric, or any of the stocks in the table above, you can do so with our free application, My Watchlist.
- Add MEMC Electronic Materials to My Watchlist.
- Add Roper Industries to My Watchlist.
- Add National Instruments to My Watchlist.
- Add Itron to My Watchlist.
- Add Emerson Electric to My Watchlist.
Add all the companies to My Watchlist.