Colgate-Palmolive's (CL) stock buyback program is rather interesting because the company is one of two S&P 500 companies (the other being Exxon Mobil (XOM)) that has bought back stock on the open market every single month since 2004. Unfortunately, the company's share buyback has only reduced the share count from 526 million shares outstanding in 2004 to 472 million shares outstanding at the end of 2012. The current share count is 89.7% of what it was in 2004. Of course, Colgate has grown earnings by a little over 10% in that time frame, so investors have done quite well despite the ineffectiveness of the buyback.
The company's approach to share buybacks is this: the company does not allocate a particular dollar amount to go towards the repurchase of shares, but rather, authorizes management to repurchase a certain number of shares over the lifetime of the program. For instance, Colgate-Palmolive currently has 40 million shares remaining to be bought back on its 50 million share authorization program that got announced here in September 2011 (most likely, it will be fewer than 40 million once the final 2012 numbers are out).
In 2011, Colgate-Palmolive bought back a total of just under 5 million shares at an average repurchase price of $89.87. While that price may seem attractive now given that the stock is currently trading at $107 per share, the average share purchase price of $89.97 in 2011 was not optimal given that the stock traded between $74.90 and $94.90 over the course of 2011. Given that the company's share buybacks came much closer to the 2011 price highs than the 2011 price lows, it raises questions about whether the company is maximizing shareholder value with the conduct of its share repurchase program.
This brings me to my two concerns about Colgate-Palmolive's current share buyback program. The first is that the current market price of Colgate-Palmolive is too high to qualify as "creating shareholder value", and the second is that the company points out that part of the share repurchase program is aimed at mopping up shares that get created to cover executive compensation. Here's what the company has to say:
"On September 8, 2011, the Company's Board of Directors authorized a new share repurchase program that replaced the Company's previous share repurchase program which had been approved in 2010. The 2011 Program authorizes the repurchase of up to 50 million shares of the Company's common stock. The Board also has authorized share repurchases on an on-going basis to fulfill certain requirements of the Company's compensation and benefit programs."
My first concern is that the company mentions that the shares will be repurchased on an on-going basis. Given that the company has a track record of repurchasing shares in every month dating back to 2004, this is troublesome. While it's good that the company had the gumption to stick with its share repurchase program during the stock price lows of 2008 and early 2009, it is less welcoming news that the company is currently buying back shares when the stock market is valuing the firm at 21x earnings, a valuation (on a normalized earnings basis) that the company has not seen since 2004. If the company is paying more than the shares are worth to retire shares, then no value is created.
There is also the problem that the company has about 5.7 million shares that have been awarded in executive compensation since 2009. From an earnings per share standpoint, this has cost shareholders about a nickel per share. The company actually earned $4.98 per share in 2011, but because of vesting stock options and other perks of executive compensation, shareholders could only realize a benefit of $4.94 per share, adjusting for the share dilution.
While I commend Colgate-Palmolive for its tenacity in retiring shares throughout the financial crisis, there have been two problems that have limited the effectiveness of the company's share buyback program. The company buys back shares every month, which means that the company is possibly paying more than it should by paying 21x earnings to buy back shares at the current price of $107 per share. Additionally, the fact that management has diluted the fellow stockholders by creating 5.7 million shares since 2009 to compensate management has also weakened the effects of the company's stock buyback program. While the company has been relentless in buying back shares, the current market price of the buyback and dilutive executive compensation has greatly limited the benefits of the buyback realized by long-term shareholders. Fortunately for investors, the business has been growing at such a nice 10% annual clip that the ineffectiveness of the buyback program has not hindered the total returns achieved by long-term investors of this storied company.