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 IBM (NYSE: IBM).
How much, for how long?
The new repurchase authorization adds $7 billion to the $5.2 billion remaining from the prior authorization. The company expects to request an additional share repurchase authorization in April 2012!
How cheap is the stock?
IBM's announcement contains no reference to price or intrinsic value. That's a red flag because the relationship between price paid and intrinsic value is the only factor that determines whether the share repurchases are compounding or destroying shareholder wealth. How are we to know that IBM's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, IBM trades in the middle of a group with four of its competitors:
|
Company |
Forward P/E |
|---|---|
| EMC (NYSE: EMC) | 15.1 |
| Oracle (Nasdaq: ORCL) | 13.3 |
| IBM | 12.9 |
| Microsoft | 9.4 |
| Hewlett-Packard (NYSE: HPQ) | 5.9 |
Source: S&P Capital IQ.
Is this a buy signal?
IBM's price-to-earnings multiple is in the middle quintile relative to its industry peers and relative to the companies in the S&P 500, and in the upper half compared with its own five-year history. In that context, and at 13 times the next 12 months' estimated earnings, the shares don't look like any particular bargain. If you want to own a technology stalwart, Microsoft or Hewlett-Packard look like much more attractive choices -- compared to each of the three benchmarks we mentioned for IBM, both stocks are in the bottom quintile. You can track them with our free application, My Watchlist:
- Add Oracle to My Watchlist.
- Add Microsoft to My Watchlist.
- Add International Business Machines to My Watchlist.
- Add Hewlett-Packard to My Watchlist.
- Add EMC to My Watchlist.
- Add all the companies to My Watchlist.
