After the market close on Wednesday, Cerner Corporation (CERN) announced a $170M stock buyback. The stock was up slightly in after-hours based on the news, but shareholders should absolutely ignore this supposedly good news.
A leading supplier of healthcare information technology had a buyback plan since 2008 that has had little use or impact.
More importantly, the company announced that the plan would only encapsulate 2.1M shares, or 1.2% of the company's shares outstanding. Why does the company even bother at that level? On top of that, why does the CEO claim that the buyback program is a good use of funds with the stock trading at 28x forward earnings? The stock trades above the expected growth rates suggesting limited value.
Stock Buyback History
For the stock buyback to be significant enough to sway investors, the amount needs to be considerably higher. A level suggesting that the stock trades at an extreme valuation compared to the assets and profit generation of the company.
While the company claims to have an existing buyback plan, it hasn't bought any stock in the last year. On top of that, the company has increased shares outstanding by 11m shares over the last five years. Notice how the chart below shows a steady increase in cash and short-term investments, yet the company hasn't utilized any of the cash when the stock was considerably lower.
As with the Cummins (CMI) buyback, these results back the typical investor's opinion that buybacks are worthless. Remember that while the company claims that the buyback is a reward to shareholders, it only rewards them if the company purchases the shares at a significant discount to the net present value. Otherwise, the company forecasts higher stock prices in the future to make the current price of $79 worthy of spending precious cash. The $170M buyback appears more a standard move than anything strategic.
Net Payout Yields
Combined with no dividend yield, the company would have a weak 1-2% net payout yield. The net payout yield is the combination of the net buyback yield and the dividend yield. The average stock in the net payout yields 16% with buybacks on average over 10%. Those levels of buybacks signal real value compared to the limited amount undertaken by Cerner.
Anybody investing in Cerner should base the decision on the prospects of the company and not the stock buyback. In fact, the preference would be for Cerner to undertake a more strategic buyback where cash is conserved for periods of extreme stock weakness and not used on a routine basis to purchase shares to reduce the impacts of stock options.
Additional disclosure: Please consult your financial advisor before making any investment decisions.