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 health information portal WebMD
How much, for how long?
WebMD is adding $75 million to its repurchase program for a total authorization of roughly $90 million. There are no other restrictions on the program.
How cheap is the stock?
WebMD'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 WebMD's management understands this (or whether they care)? Just how cheap (or expensive) are the shares right now? Based on price-to-earnings, WebMD shares trade above a group of four of its peers:
|
Company |
Forward P/E |
|---|---|
| WebMD Health |
30.1 |
|
Monster Worldwide |
17.0 |
|
ValueClick |
17.9 |
|
Ancestry.com |
15.1 |
| Healthways |
7.9 |
Source: S&P Capital IQ.
Is this a buy signal?
WebMD's price-to-earnings multiple is in the top quintile relative to the companies in the S&P 500 and the top half relative to its industry peers, but it's in the bottom quintile of its own five-year history. At nearly 31 times next 12 months' estimated earnings, the shares don't look like any kind of bargain. I'd be more inclined to look at Healthways instead. If you want to follow WebMD, Healthways or any of the stocks in the table above, you can track them with our free application, My Watchlist:
- Add WebMD Health to My Watchlist.
- Add ValueClick to My Watchlist.
- Add Monster Worldwide to My Watchlist.
- Add Healthways to My Watchlist.
- Add Ancestry.com to My Watchlist.
- Add all these companies to My Watchlist.
