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 electronics retailer RadioShack
How much, for how long?
RadioShack's new repurchase authorization is $200 million, which the company expects to spend over the next 12 months. There are no other restrictions on the program.
How cheap is the stock?
RadioShack trumpeted its new repurchase program as "part of a new capital allocation strategy designed to balance business growth opportunities with continued strong cash flow and provide a more consistent return of excess cash to long-term shareholders." Unfortunately, the 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 RadioShack's management understands this (or whether they care)?
Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, RadioShack shares trade in the middle of a group of four of its specialty retail peers:
Source: S&P Capital IQ.
Is this a buy signal?
RadioShack's price-to-earnings multiple is in the middle quintile relative to its industry peers, the bottom quintile relative to the companies in the S&P 500, and the bottom half of its own five-year history. At less than 10 times next 12 months' estimated earnings, the shares look attractive on a first pass. If you want to begin following RadioShack or any of the stocks in the table above, you can track them with our free application, My Watchlist:
Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool owns shares of RadioShack and Best Buy. Motley Fool newsletter services have recommended writing covered calls in Best Buy. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.