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FedEx Moves Aggressively to Return Cash to Shareholders

By Adam Levine-Weinberg - Oct 15, 2013 at 4:35PM

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FedEx has built up a $5 billion war chest over the last few years. Now, it plans to give most of that money back to shareholders.

Since this past spring, I have highlighted the investment opportunity in FedEx (FDX 0.62%) here at The Motley Fool. The company is in the midst of a three-year restructuring process that will cut costs in its express business, leading to significant margin growth. Moreover, unlike many companies that restructure, FedEx is still growing revenue, especially in its ground business.

This combination of revenue growth and margin growth made FedEx a compelling investment opportunity back in the spring, especially as it was trading at just 16 times trailing earnings. On Tuesday, FedEx gave investors yet another reason to cheer: The company announced that it will return a significant amount of cash to shareholders through share repurchases.

Growing cash stockpile
While FedEx competes in a capital-intensive industry, it has historically generated plenty of cash to fund its growth without taking on a lot of debt. FedEx is investing $4 billion this year in order to replace older, fuel-guzzling aircraft and to lay a foundation for growth in its U.S. ground-shipping business.

FedEx is investing heavily for growth.

Despite these heavy investment plans, FedEx should generate plenty of cash in its operations to cover the costs. FedEx generated operating cash flow of $4.7 billion in its most recent fiscal year, and $4.8 billion the year before that.

With such strong cash flow, FedEx has been reliably growing its cash and investments stockpile for the past few years. In fact, the company's cash balance more than doubled from $2.3 billion to $4.9 billion between May 2011 and May 2013. Since FedEx generates cash so reliably, there's no reason the company needs to carry such a large cash reserve.

Time for a nice buyback
Evidently, FedEx's board of directors came to the same conclusion recently. On Tuesday, the company announced a new 32 million share repurchase program, which will be added to the 7.4 million shares left on the previous repurchase program. The increase in FedEx's share buyback program represents approximately 10% of its total share count (317 million shares).

By aggressively returning cash to shareholders through a major share repurchase, FedEx will augment its organic earnings growth over the next few years. Growth at FedEx Ground and margin improvements at FedEx Express have already created the groundwork for EPS to grow from $6.23 last year to around $10 by fiscal year 2016. Assuming that FedEx completes the new share repurchase program by then, it will boost EPS by another 10%.

Foolish conclusion
After rallying as high as $122.50 on Tuesday, FedEx shares are no longer the "slam-dunk" buy they were just a few months ago when the stock was stuck below $100. Still, FedEx is poised for strong earnings growth over the next few years, which will be accentuated by the new share repurchase program.

FedEx has a very realistic chance to grow EPS to $11 by fiscal year 2016, with plenty of room for growth thereafter (assuming a reasonably cooperative global economy). With such good prospects, FedEx may still be worth a look for long-term investors.

Fool contributor Adam Levine-Weinberg has no position in any stocks mentioned. The Motley Fool recommends FedEx. 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.

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