People have long speculated about how share repurchase plans affect long-term stock prices. As I see it there are three ways companies can return money to their shareholders: Reinvestment in the company in the form of Capex spending, Cash in the form of dividend payments, and increased returns on equity in the form of share repurchases. I thought I would take this opportunity to show my support for company share repurchase plans and discuss a few companies that currently use this strategy. I will also highlight the impact that these repurchase plans have made on each company's bottom line profits.
International Business Machines Corp (IBM)
There is probably no other company that is more famous for share repurchase plans than IBM. IBM has made a commitment over the years of not only seeking high margin contracts but have also sought to better those margins for its investors with numerous share repurchase plan. It just recently approved an additional 5 billion dollars for share repurchases, which currently leaves almost 11.2 billion dollars currently allocated and not yet used for share repurchases.
As you can see IBM's revenue has been fairly flat over the last five years, while its net income has increased 34.6% over this same time period. IBM's EPS numbers have increased an impressive 61.6%. I attribute a large portion additional EPS gains to the 16.5% reduction in outstanding shares from IBM's repurchase plans. Over a five-year time frame IBM's share repurchase plan has impacted the EPS numbers by an impressive $2.42. Without the share repurchases over the last five years, IBM's 2012 full-year's earnings would have been somewhere in the $11.94 range.
IBM's share price over this same five-year time frame has seen impressive growth bolstered by its consistently increasing earnings per share and net income. IBM is a company that shows little increasing revenue from year to year. Investors in these types of companies therefore focus on the EPS number from year to year. I will therefore surmise that if the share repurchase plan is responsible for 40% of the total EPS increase for this time frame that we must attribute 40% of the share price increase to IBM's share repurchase plans. IBM share price has increased from around $97 at the start of 2008 to over $180 at the end of 2012, an increase of around $83 per share. Of that $83, $33 would be attributable to IBM's share repurchase plan.
Wal-Mart Stores Inc (WMT)
WMT over the last five years has committed to buying back its outstanding shares. WMT is a retail powerhouse that not only boasts growing revenue domestically and globally but now with the current management commitment to share repurchase plans also sports a falling outstanding share count. Management has decided to double down on the company by estimating that the share repurchase plans will escalate the rate of earnings growth for its investors.
WMT has reduced the number of outstanding shares by a little over 14% over the last five years. If the share count for 2008 was the current number of outstanding shares WMT's EPS would be $4.30 instead of the current $5.02. Without WMT's share repurchase plan five-year EPS growth would have been almost 27% a very impressive 5.3% annual EPS growth rate. Once you factor in the impact of share buybacks however WMT's five-year EPS growth leaps a very impressive 48%, which translates to an annual EPS growth rate of 9.6%.
WMT has traded fairly sideways for the last several years. During 2012 however we began to see the compounding effect of share buybacks and growing revenues begin to push the stock price higher. Unlike IBM, which has fairly flat revenue year to year WMT' has a growing revenue stream. This doubles the effect of the share buybacks by amplifying annual EPS performance.
Intel Corp (INTC)
INTC is a very interesting company from a revenue perspective. Although the company is a very cyclical company that is dependent upon market currents to really define demand for its product offerings, it does a fairly decent job of trending revenue growth higher over longer time frames. INTC has been hurt recently by the rapidly shrinking PC market currently being negatively influenced by the affordability of tablet computers utilizing ARM chipsets. Rather than compete for the low-margin profits in the manufacturing of mobile chipsets INTC continues to focus on higher-margin projects. The acquisition of McAfee by INTC in 2010 is evidence that INTC would rather expand its product offerings into the software realm rather than chase small margin manufacturing profits.
INTC's revenue jumped dramatically in 2010 and 2011 bolstered by INTC's acquisition of McAfee. Around this time INTC began a commitment to share repurchases. It viewed its current stock price at a value and since 2010 has reduced its outstanding share count by almost 10%. ITNC's share repurchases since 2010 have helped to stabilize EPS performance for a company that is still seeking new avenues to profit from the mobile computing revolution. Without INTC's share repurchases over the last two years 2012's earnings per share would have been $1.93 instead of the reported $2.13. This 10% increase in EPS from share repurchases has helped to stabilize INTC's stock price. INTC is clearly in a transition phase from a high-end growth company to an income generating company and share repurchase plans are a great way to help bolster its income potential.
Since INTC committed to a more stable share repurchase plan in 2010, you can see, that even though the headwinds for INTC have kept its share price low, the repurchase plans have helped to stabilize the stock's price.
Lowe's Co (LOW)
LOW has seen flat revenue growth and fluctuating profit margins due to slow housing growth. Much like INTC, LOW has used recent share repurchases to cushion its lackluster earnings growth. If or when the housing segment begins to rebound, these repurchases will help LOW realize better EPS performance than it would have five years ago.
LOW has been buying back shares since 2008 but has recently increased the share repurchase amounts and has reduced the number of outstanding shares by 21% since 2008. Share repurchases increased 2012 EPS profitability by $0.36. Without share buybacks 2012 full-year EPS would have been $1.33 instead of the $1.69 reported. LOW until recently had struggled with a way to continue to increase profitability especially considering it has been losing market share recently. The share buybacks have a very likely chance of helping LOW increase profitably for its investors if it continues to implement them.
LOW traded mostly sideways until the share buybacks began to affect EPS numbers positively as evidenced by the share price increase in 2011 and 2012.
Home Depot Corp (HD)
HD unlike its competitor LOW has seen its revenue slowly increase and has also seen significant increases in net income due to better workforce and supply chain management. HD began to implement its share buyback plans in 2010, as I believe a way to return added value to its investors.
Home Depot has reduced its outstanding shares by almost 11% since 2009. When you couple this repurchase affect with HD's continued improvement in margin profitability you have a company that is continuing to accelerate its EPS performance. Without HD's share repurchases 2012, full-year EPS would have been $2.68 instead of the $3.00 that was reported. If HD continues to employ share repurchase plans with continued improvement in net income this company may be set for a significant ride higher.
As you can see the accelerating effects of the share repurchase plans have helped HD push its share price higher starting in 2011, the year that HD began to ramp up its number of buybacks.
As you can see from the five companies above share repurchase plans can be a boon to many types of companies in many different scenarios. The bottom line is if the company can spare the cash to buy back its shares that company demonstrates a clear long-term goal to return value to its investors. Please comment in the section below and let me know what you think about share buybacks.