Last Thursday Hewlett-Packard's (NYSE:HPQ) board approved a $4 billion share repurchase. This is in addition to the $3 billion repurchase program approved in September 2004.
When a company is so aggressive in repurchasing its stock, it is usually a sign that management has great prospects on the horizon and wants the company and its senior shareholders to reap the majority of the benefit. By repurchasing stock, the company may reduce its cash balance, but it can dramatically increase its earnings per share. The reason: As the number of shares outstanding is reduced, net income is spread out over fewer shares.
With very strong third-quarter results, it's not surprising that HP is in a position to reduce its shares outstanding even further. HP management said it would repatriate $14.5 billion in foreign earnings. Those earnings do reduce net income through taxation, but they have put HP in a position of strength with regard to cash flow.
At this point, it is unclear how great HP's prospects really are. It continues to face rigid competition from Dell (NASDAQ:DELL) and IBM (NYSE:IBM), and new CEO Mark Hurd has had to make tough decisions, including the trimming of 14,500 jobs in a restructuring effort. While Wall Street has applauded this decision, it should serve as a reminder that not too long ago the company was struggling against the competition.
Nevertheless, I hold out hope for HP. In an attempt to stay on the forefront of new technologies, it announced a plan to invest $150 million in radio frequency identification technology (RFID). In developing RFID chips with Hitachi (NYSE:HIT), HP plans to remain competitive against Sun Microsystems (NASDAQ:SUNW) and Symbol Technologies (NYSE:SBL), the current leaders in this emerging technology.
Now $150 million is just a tiny chunk of HP's $80 billion operating budget. If RFID technology grows at the dynamic rate that many analysts are predicting, then HP's small investment will be returned in spades. HP already provides RFID chips for the printers and computers it supplies to Wal-Mart (NYSE:WMT) and other retailers.
While RFID is but one example of HP's future prospects, I believe that the share buyback, when viewed alongside Mark Hurd's aggressive leadership, shows that HP is going to be a serious contender in the years to come.
For a more in-depth look at HP's turnaround potential, read HP: A Profitable Turnaround Play?
Philip Durell of Motley Fool Inside Value always likes a good turnaround story. To see what he's been looking at,click here.
Fool contributor Tarek Sultani is a freelance journalist. He welcomes your comments. He owns options in Sun Microsystems. The Fool has an ironclad disclosure policy.
