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 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 tobacco giant Altria (NYSE: MO).
How much, for how long?
The new repurchase authorization is $1 billion worth of shares to be acquired by the end of 2012. The previous $1 billion program was completed during the third quarter.
How cheap is the stock?
Altria's announcement contains no reference to price or intrinsic value. That's unfortunate since 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 Altria's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, Altria trades in the lower half of a (very tight) group that includes four of its peers:
|
Company |
Forward P/E |
|---|---|
| Philip Morris International (NYSE: PM) | 14.4 |
| Reynolds American (NYSE: RAI) | 14.2 |
| Lorillard (NYSE: LO) | 13.7 |
| Altria | 12.8 |
Source: S&P Capital IQ.
Is this a buy signal?
Altria's price-to-earnings multiple is in middle quintile relative to the companies in the S&P 500 and to its own five-year history. Relative to the industry, Altria's P/E of 12.8 is in the bottom half, but the shares don't look like a particular bargain -- and they certainly aren't "significantly undervalued." Nevertheless, Altria and its peers are pretty good businesses, and valuations can always become more attractive. You can track these stocks with our free application, My Watchlist.
- Add Reynolds American to My Watchlist.
- Add Philip Morris International to My Watchlist.
- Add Altria Group to My Watchlist.
- Add Lorillard to My Watchlist.
- Add all of the companies to My Watchlist.
