Amgen: Will The Buyback Work This Time?

| About: Amgen Inc. (AMGN)

After the market close on Thursday, Amgen, Inc. (NASDAQ:AMGN) announced an additional $2B stock buyback plan. The company executed a very successful buyback over the last year, so this additional plan is noteworthy, especially considering several companies have announced buybacks this week that aren't interesting or material.

The company is a leading independent biotechnology medicines company that previously had a $10B buyback plan that has at least partially helped the stock to all time highs.

This plan adds $2B to around $500M left on the previous plan. This leaves Amgen with $2.5B that it forecasts will be spent by early 2014. Also, the company significantly increased the dividend to $0.47 for Q113. This increases the dividend yield to 2.1%.

Stock Buyback History

While the company has had a successful buyback in the past, this one probably needs to be more significant to sway investors. Considering the stock surge to all time highs, the buyback 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.

In the Q3 earnings report, the company announced it repurchased approximately 10M shares at a total cost of $797M at an average price of $82.18. That brought the total shares repurchased under its $10B authorized program to 131M at a total cost of $8.4B and at an average price of $64.19.

As the chart below shows, most of the repurchased shares were at considerably lower levels than the current price of $89:

AMGN Chart

AMGN data by YCharts

Unlike the Cummins (NYSE:CMI) buyback, these results show that the buyback actually worked well. Amgen bought significantly more stock when the price was much lower. Unfortunately, the net buyback amount has dropped as the stock price has increased. Similar to the Cerner (NASDAQ:CERN) buyback, the amount announced appears to be too small.

Net Payout Yields

Combined with the new 2.1% dividend yield, the company would have only a 4-5% net payout yield at the new repurchase level. The net payout yield is the combination of the net buyback yield and the dividend yield. The average stock in the net payout yields top 10 yields 16% with buybacks on average over 10%. Ironically, Amgen is in the current list, but the forecasted buybacks suggest the company will quickly fall from the list.

As the graph shows, the company had a massive $5B buyback of 83M shares at $60 in Q411. Once this amount falls off when Q412 is reported, the net payout yield will plunge.


Amgen might have undertaken one of the best buybacks in history back at the end of last year. The company spent $5B in the tender offer that provided fuel for the stock gains of 2012. Combined with additional repurchases during the year, the stock is now at a level that the company would have to massively increase the repurchase level to suggest the stock is a good deal going forward.

While the management team has been more prudent with past stock buybacks, the stock has hit all-time highs around $90 while the previous program was started when the stock languished in the $50s. Not to mention, the new plan is only 20% of last year's. Investors might be best to heed the message from management on this new plan. The stock is only 20% as attractive at these levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Please consult your financial advisor before making any investment decisions.