Stock Buyback Blitz

By Bristol Voss  JUL 27, 2012 1:00 PM

Cash-rich companies are busy snapping up their own stock. Investing in themselves while beating the possible end of Bush-era tax cuts.

 


MINYANVILLE ORIGINAL In the past week, quite a few companies have announced their intentions to buy back their own stock. Baxter (BAX) authorized a $2 billion share repurchase program, Visa (V) and Lockheed (LMT) each said they would spend $1 billion to buy their own stock, and American Greetings (AM) said it was earmarking $75 million for the same purpose.

While it may be true that, as Warren Buffet said, "Many CEOs never stop believing their stock is cheap," there's also something else going on: Tax cuts that could end this year.  Bush-era taxes cap both the long-term capital gain rate and stock dividend rate at 15%. Buybacks are taxed at the capital gains rate.

The tax rate issue is already a hot topic. Even though President Obama has asked the House to "do the right thing" and pass a one-year extension of the Bush-era cuts, there's no guarantee he'll get his wish. While the Senate narrowly approved the extension, the House (which is overwhelmingly Republican) is likely to reject the bill.

With such uncertainly, it's obvious that some companies just don't want to wait and see how it all turns out.

In fact, this week's group is a little late to the party. Earlier this year, Walt Disney (DIS) snapped up $1.67 billion worth of its stock following a $5 billion repurchase in its last fiscal year. CBS (CBS) said it would buy back $1.7 billion worth of shares, thus bringing its total buyback program, started in January 2011, to $3 billion. News Corp. (NWS), which has already spent $4.89 billion on buybacks since last July, announced it plans to buy back over $5 billion more by January 2013.

Other than tax savings, buybacks have other more immediate benefits. They reduce assets on the balance sheet, which translates into higher return on assets and return on equity -- all without any change in earnings. They also drive down that ubiquitous measure, the price-earnings ratio, which will make it appear that a company is less expensive than it was before the buyback.

As far as benefits for the shareholder, buybacks are usually considered a good thing when the stock is selling at a material discount to its intrinsic value.

Some buybacks are designed to boost investor confidence. Travelzoo (TZOO) announced Thursday it would repurchase up to one million shares. At the current price, this represents a nearly $22 million investment. Second quarter profits soared nearly 50% to $7.3 million even though the stock is off 75% over the last 12 months. On Friday around noon eastern time, Travelzoo was trading up 4.37% on the day at $21.75/share. This current buyback is a replay of the one in August 2011 when the company repurchased 500,000 shares, resulting in a jump in value of 4.9%.

While Travelzoo's buybacks bolstered the stock, RadioShack's (RSH) 12-year $2.6 billion repurchase has not only infuriated investors, but appears to have had little positive effect. Over the same period, RadioShack stock fell from $24.33 to $2.53. On Wednesday, the company announced losses of $21 million and the suspension of its dividend to conserve cash and reduce debt, which will minimize its debt-to-equity ratio. Consensus estimates were for a dividend of $.03/share and the loss of $.21/share did not sit well with analysts, improved debt-to-equity ratio aside. On Thursday, to no one's surprise, the stock was downgraded.

No positions in stocks mentioned.