10 companies buying their own stock.

Already this year, U.S. companies have announced plans to snap up more than $210 million worth of their own shares, which usually means higher stock prices. Here are the 10 biggest buybacks so far.

 

Stock traders look at monitors displaying financial information. (© Joshua Hodge Photography/E+/Getty Images)

Driving prices higher

The stock market has been churning higher for a lot of reasons — including the large number of investors who spent years waiting on the sidelines, now trickling back in with every tick higher.

But here’s a reason for the rally that hasn’t been talked about quite so much: Companies are buying back tons of their own stock.

Through May 1, U.S. companies announced a massive $210.6 billion worth of stock buybacks — a level we haven’t seen in the past decade, according to Thomson Reuters. That’s 93% higher than the average for the prior 10 years.

Companies are buying back so much stock because they think their shares are underpriced. They’re also simply awash in cash after hunkering down during the financial crisis. Some, like Apple (AAPL), are under pressure from shareholders to unleash their reserves. Others, including PepsiCo (PEP), are mature companies that don’t have many other ways to use the tons of cash they spin off.

Whatever the reasons, U.S. companies have $1.7 trillion worth of cash. So you can expect the big buybacks to keep marching on.

What’s in it for you? Two key takeaways:

  1. These massive planned buybacks should nudge stocks and the market higher, barring scary disasters. That’s because of the sheer buying demand from companies.
  2. You can do well buying the shares of buyback leaders, as long as the stocks aren’t overpriced, says a study by Merrill Lynch. Besides the buying pressure from buybacks, this is because of some simple math. With fewer shares on the market, a company is worth more per share.

Here’s a look at the 10 biggest buyback announcements through the end of May 1, and some thoughts on whether you should join these companies and buy their shares.

A man talks on his cell phone as customers walk through an Apple store. (© Lucas Jackson/Newscom/Reuters)

 

Apple

2013 announced buyback: $50 billion

Apple (AAPL) is a case study in the power of the buyback. Its shares were in a grindingly painful decline from above $700 last September through mid-April, when the stock pierced $400. Then on April 23, the company upped its recent buyback plan by a massive $50 billion, to a total of $60 billion. It also hiked its dividend to $3.05 a share. The stock hasn’t looked back since. It traded recently at $450.

“The buyback and increased dividend have really brought a new investor base into the stock,” says David Heupel, a stock analyst with Thrivent Financial for Lutherans. That would be income investors — those who shop for dividends and buybacks.

Will that be enough to restore Apple stock to its glory days when it traded above $700? Probably not. One problem is that Apple products have lost a bit of their luster, so Apple has lost its pricing power. The average price of iPhones and iPads slipped 4% in the first quarter, as consumers bought competing products and Apple expanded in emerging markets. Above all, though, a read of Walter Isaacson’s biography “Steve Jobs” reveals just how much Apple was a personality-driven company. And, sadly, that personality is gone forever.

We won’t really know Apple’s fate until we see new products, and that won’t happen for another six months, says Mike Sorrentino, chief strategist at Global Financial Private Capital, a value shop. “Apple is probably range-bound for the time being,” he says. Sorrentino thinks the downside risk is limited, because Apple has a “war chest” of cash to defend its stock with buybacks. But upside? Possibly limited, too

Customers walk towards a Home Depot store in Washington, D.C. © Andrew Harrer/Bloomberg via Getty Images

Home Depot

2013 announced buyback: $17 billion

Buying the shares of companies with the biggest buyback plans — the top fifth — beat the market by 1.3 percentage points in annualized returns for 1986-2012. But that outperformance goes up to 3.5 percentage points if you focus on buyback companies with cheap shares. This strategy produced 13.3% annualized return versus 9.8% for the market, according to a study by Merrill Lynch.

This little piece of wisdom is all you need to know to be wary of Home Depot (HD) as a potential buy because of its huge buyback plan. Home Depot’s stock trades for 21 times estimated 2013 earnings, compared to 14.7 for the S&P 500 ($INX), says John Kozey, a senior analyst at Thomson Reuters. (Stock price times earnings, or the price/earnings ratio, is a common measure used to gauge if a stock is overpriced or underpriced.)

“I would not want to own Home Depot because I would not want them paying 21 times earnings for a company,” says Patrick Kaser, a portfolio manager at Brandywine Global, meaning its own shares. “I’d rather have them give me the cash, so I can buy a company at 11 times earnings,” he says, referring to cheaper stocks available in discounted areas such as large-cap tech, energy and banks. Home Depot should probably be raising its dividend instead of buying back stock.

A Merck scientist at the company's Pennsylvania lab earlier this year. © Matt Rourke/AP Photo

Merck

2013 announced buyback: $17 billion

If Home Depot isn’t attractive based on its buyback plan because its shares are too expensive, then what buyback giant looks a lot better because its shares are cheap? That would be Merck (MRK).

Merck stock fell under $46 recently, from above $48.50, on soft earnings news and weak guidance. It now trades at a 32% discount to its peers, according to Thomson Reuters, using its trailing price-earnings ratio, another common measure of a stock’s relative value.

One of Merck’s biggest challenges is that its blockbuster asthma drug, Singulair, started facing competition from generic versions last summer. It sorely needs some new hits, but its pipeline has not produced. Merck has been cutting costs in response, and it just brought in a new head of research, Roger Perlmutter.

The pharma giant does have strengths in vaccines, animal health and consumer products. Combined with a massive buyback plan, these positives make its stock look attractive in the pullback, believes Heupel, at Thrivent Financial for Lutherans.

BingWhat’s in the Merck pipeline?

A General Electric logo hangs above the entrance to a GE news conference in New York in 2009. © Daniel Acker/Bloomberg via Getty Images

General Electric

2013 announced buyback: $10 billion

Back in February, General Electric (GE) announced a huge, $10 billion buyback plan for 2013. “This tells us they are feeling more confident,” says David Fried, editor of The Buyback Letter.

It also tells us that it has tons of cash and that it’s tough to find uses for it, since the company already pays a 3.4% dividend yield and there aren’t enough potential acquisitions around. Where is all this cash coming from?

In February, GE sold its remaining stake in NBC Universal to Comcast (CMCSA) for $16.7 billion. That brought in $12 billion (the rest is made up of loans to Comcast). Just before that deal, GE had reported $15.6 billion in cash on hand.

The other source of cash is GE Capital, which does leasing and commercial, consumer and real-estate lending. GE is deliberately shrinking this business. This frees up cash that GE is redeploying to shrink its share count, to offset the hit to earnings from a shrinking GE Capital, says Kaser at Brandywine Global.

GE is struggling with weakness in Europe. But the company is solid in its core businesses, such as energy equipment, and the stock looks cheap. Plus a director bought $218,000 worth of stock at $21.80 in late April. Any time both a company’s board and an insider sees value in a stock, I’ll take that as a good sign.

Bottles of Pepsi cola drinks on display. © Mike Segar/Newscom/Reuters

PepsiCo

2013 announced buyback: $10 billion

When a company controls 40% of the planet’s salty snack market and boasts powerful brands such as Pepsi, Gatorade, Tropicana, Lay’s and Doritos, it’s bound to throw off lots of cash. And that’s what we see at PepsiCo (PEP).

But a company this big also has some natural limits on just how fast it can grow. As this puts a lid on internal investment opportunities, what’s a company to do with all its cash? PepsiCo already pays a 2.7% dividend yield. So one obvious answer: Give the cash back to shareholders.

The problem, though, is that PepsiCo stock has been on fire this year, advancing 23% to all-time highs of $84.32. The stock has retreated slightly, but at just under $83, it still trades for a fairly rich valuation of 17.3 times 2014 earnings, which is about 20% above its historical average and 10% over the $75 fair value estimate for the stock by Thomas Mullarkey, at Morningstar. Buybacks at rich valuations aren’t a great deal for shareholders.

There’s a decent chance PepsiCo might use some of its financial clout to buy Mondelēz International(MDLZ), the snack food company housing popular brands such as Oreo, Nabisco and Cadbury, Mullarkey says. But a Mondelēz purchase or no, PepsiCo stock seem pretty pricey, especially for a major buyback. I’d wait for a pullback, despite the huge buyback plans.

Fred Harster drives a UPS truck on Park Avenue in New York in 2009. © Daniel Acker/Bloomberg via Getty Images

United Parcel Service

2013 announced buyback: $10 billion

United Parcel Service (UPS) is the biggest shipping company in the world, delivering more than 16 million packages each weekday on average. As such a huge transport company, UPS offers a great read on the economy, so I’ll take it as a bullish signal for the economy that UPS has such a big buyback plan in place.

Like PepsiCo, United Parcel Service stock has been on a tear of late. It’s up 19% since it started its most recent leg up in early December, to trade recently at $86.

But this doesn’t necessarily negate the buyback here, because the valuation on UPS is not so rich. UPS trades for 15 times 2014 earnings, or just above the market multiple. Yet UPS has a much bigger protective moat than most companies in the stock market. That’s because it would be tough to replicate its global shipping network, brand and solid reputation among customers.

The bottom line: A pullback in UPS stock would not be surprising, given the recent strength. But the company’s moat, its plans for international expansion and its huge buyback suggest decent gains from here.

People walk past an American Express logo. © Steven Senne/AP Photo

American Express

2013 announced buyback: $9.9 billion

Unlike capital-intensive businesses such as steel or autos, a credit card company doesn’t require huge amounts of cash. Plus bad debt is relatively low at American Express (AXP), given the affluent nature of its cardholder base. This lowers the need for reserves, so it makes a lot of sense for this very profitable company to return cash to shareholders.

American Express shrank its shares outstanding by 5.3% last year, says Fried of the Buyback Letter. It could shrink its share count again this year, given the huge size of its announced buyback. This boosts earnings per share, since it spreads out earnings over fewer shares. It also reduces the amount of cash the company needs to fund its dividend.

Plus, regulators would rather see American Express return cash via buybacks as opposed to big dividend hikes, since it’s easier to dial back share repurchases to preserve cash if hard times hit. (Investors can punish companies that cut dividends.) Trading at just 13.3 times expected earnings for the next 12 months, American Express shares are priced 5% below their five-year average. The stock is not dirt cheap, but it’s not too rich for buybacks.

Stacks of lumber frame the store's logo at a Lowe's store in Quincy, Mass. © Brian Snyder/Newscom/Reuters

Lowe’s

2013 announced buyback: $5 billion

After a decade of rapid expansion, Lowe’s (LOW) is cutting back on new store openings. It also already has poured a lot of money into setting up 14 automated regional distribution centers. Lowe’s still needs to spend on improving its supply chain, but with much of that spending out of the way, and Lowe’s dialing back store growth, it’s producing lots of cash with nowhere to spend it.

So buybacks make sense, and a lot more sense than at rival Home Depot, because Lowe’s stock is cheaper. It trades for 15.7 times 2014 earnings, compared with 21 at Home Depot. Last year, Lowe’s shrank its share base by 9.2%, says Fried, at the Buyback Letter, which is good for shareholders. Expect more of the same this year.

Lowe’s still has room to grow, even though it has slowed store growth. The reason: Home improvement is still a highly fragmented sector, and Lowe’s can still take plenty of business from smaller stores and lumberyards.

3M Post-it notes are displayed at an Office Depot in Mountain View, Calif. © Paul Sakuma/AP Photo

3M

Announced buyback: $7.5 billion

By fostering a culture of innovation and judiciously plowing money into research year in year out, 3M (MMM) has invented some of the most memorable — and profitable — products ever, such as Scotch tape and Post-it Notes.

In short, innovation is 3M’s wheelhouse, so it’s no surprise the company announced at an analyst day last November that it wants to increase research and development spending to 6% of sales by 2017 from the current mid-5% level. 3M also says it wants to spend $1 billion to $2 billion a year on acquisitions.

Those plans, plus outlays for dividends, still don’t sop up all the cash generated at a large, successful and mature company like 3M, which produces more than $5 billion a year in free cash flow. So the big buyback plans make sense.

At 15.7 times forward 12-month earnings, 3M trades 12% higher than its five-year average, according to Thomson Reuters. That’s not cheap, but it’s not outrageously expensive for buybacks. After all, this is a company with a wide protective moat around its business, the kind that Warren Buffett likes. And there will probably be pullbacks ahead when market turbulence hits, giving us a chance to buy 3M at an even better price.

The Qualcomm logo at a conference in Barcelona, Spain, in 2011. © Denis Doyle/Bloomberg via Getty Images

Qualcomm

2013 announced buyback: $5 billion

Qualcomm (QCOM) stands out on the list of top 10 buyback giants so far this year because it’s the highest-growth company there. Sales advanced 24% in the most recent quarter, compared with 18% at Apple, the only other real growth company on the list.

As a key player in the code division multiple access (CDMA) technology and wireless chip sets used in smartphones, Qualcomm produces juicy margins, which net the company lots of cash. Qualcomm has net margins of 28.9%, compared with 13.1% for companies overall, according to Morningstar, and annual free cash flow of more than $5 billion.

Yet Qualcomm trades at a reasonable price. With a forward P/E of 13, it goes for a price earnings to growth ratio of 0.9. Anything under 1.5 at a high-growth company like this one looks like good value, according to a rule of thumb developed by investor great Peter Lynch.

“We like Qualcomm at these levels,” says Sorrentino of Global Financial Private Capital. Sorrentino also likes Qualcomm’s 2.2% dividend yield and the room to increase the dividend given the company’s financial strength. Besides the free cash flow, it has more than $13 billion in cash and little debt. The key takeaway: Buybacks make a lot of sense right now, and so does buying the stock.

Source:  Bing Money Micheal Brush, Bluewaters2u Research Team,

JP’s Investment Round Table as seen Facebook

Blue’s Comments: 

And think about this… I have been told that US companies have trillions of dollars they are sitting on… now think about that… even they are not willing to chance spending their own money on expansion or research / development… they feel the need to have cash on hand in case of a downturn… Well its coming, the downturn that is… Profits are down, unemployment is high… and the Fed. keeps printing money… they may even go a bit higher than the 85 billion per month… When this bubble bursts it will be heard around the world…

10 companies buying their own stock.

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