A stock buyback isn’t always the best way to maximize value for investors. It’s usually not the best capital allocation for growth stocks. But, for a mature company with ample cash flow, it can be one of the best ways to move the needle.
How so? By reducing the amount of outstanding shares, a company can increase its earnings-per-share (EPS) numbers. In turn, this can help boost its stock price, even if underlying profits do not increase year-over-year.
Sure, this act of financial engineering isn’t always a booster-shot for stocks. As InvestorPlace’s Will Ashworth detailed earlier this year, stock buybacks can backfire. But, you can spot many of these poorly-done buybacks a mile away. The worst performing buybacks have been in capital-intensive industries (like airlines). Borrowing heavily to finance repurchases, these companies were caught in a bind as headwinds affected their business.
For companies in stable industries, using earnings to finance repurchases, it can produce much better outcomes. These buybacks can return wealth to investors, without affecting the underlying business.
What are some recent examples? These three major companies recently announced new stock buyback programs. Yes, all three are at or near all-time highs. But, their respective repurchasing plans could help each one continue to move the needle:
Stock Buyback: Adobe (ADBE)
Like with other big tech names, the novel coronavirus was a tailwind for this leading software provider. But, after rallying in the wake of the “stay-at-home” economy, investors recently cooled on ADBE stock. Even after it exceeded expectations with recent quarterly earnings release.
For the quarter ending Nov. 30, the company beat on sales estimates. Not only that, EPS came in at $2.81 per share, versus Wall Street consensus of $2.66 per share. Yet, while investors have taken their feet off the gas, there’s something on the table that could help send shares higher in the coming years. I’m talking about its newly-announced share repurchase program.
This plan calls for $15 billion in repurchases through 2024. This comes as the company’s prior $8 billion repurchasing plan starts to wrap-up. With more than $5 billion per year in operating cash flow, and around $6 billion in cash, Adobe has more than enough to finance this aggressive buyback program.
At today’s prices, $15 billion in buybacks represents about 6.6% of the company’s outstanding shares. While it’s no game-changer, it could help bolster returns for ADBE stock in the coming years. Especially if the company continues to deliver double-digit earnings growth.
One of the largest publicly-traded auto dealer groups in the U.S., AutoNation has the size and scale to weather the current environment. And not just the pandemic. Disruption by online auto dealers like Carvana (NASDAQ:CVNA) is another issue the industry must face going forward.
But, despite these challenges, AN stock crushed it in 2020. Even with March’s coronavirus crash, shares are up around 37.6% year-to-date. And, following October’s announced $500 million stock repurchase plan (representing around 8.5% of outstanding shares), the company could generate additional wealth for its shareholders.
Like with Adobe, this big buyback announcement came on the heels of a strong quarter. Beating consensus on earnings, both AutoNation’s new and used car sales numbers exceeded expectations.
And, with the company not expected to deliver earnings growth in 2021, returning earnings to shareholders via a buyback may be the best way for it to put more points in AN stock. Sure, if the unexpected used car market strength in the time of Covid-19 starts to reverse, shares could cool from here. But, with the buyback program helping to shore up EPS, investors in this stock could still see solid returns going forward.
Sure, based on what I wrote above, I shouldn’t be including this major railroad company here. The old-school industry to beat all old-school industries, a railroad is going to be much more capital intensive than say, a SaaS business.
But, even with this and pandemic headwinds in mind, the $5 billion stock buyback program could help shore up shares. This new program is on top of the $1.1 billion remaining in the prior CSX stock repurchase program. Add them together, and that’s $6.1 billion available for repurchases, or around 8.8% of outstanding shares.
With shares changing hands at a forward price-to-earnings (P/E) ratio of 25, valuation could be a concern here. Granted, its peers trade at similar (or higher) valuations. But, while most on the sell-side remain bullish, analysts at Morgan Stanley recently downgraded the stock, giving it a $60 per share price target (CSX trades for around $90 per share today). Valuation was the main rationale behind their decision.
Consider taking a wait-and-see approach for now, but keep CSX stock (and its massive buyback plans) on your radar in 2021.
On the date of publication, Thomas Niel did not (either directly or indirectly) hold any positions in the securities mentioned in this article.
Thomas Niel, a contributor to InvestorPlace, has written single stock analysis since 2016.