Factset published an interesting report on the amount of buyback activity taking place in the market. Total value of buybacks for 2012 amounted to more than $384B with fourth quarter stock repurchases running just under 10% over the same period in 2011. Dollar-value of buybacks amounted to 79.1% of free cash flow on a trailing twelve month basis, which is the largest value since Q3 2008.
In a healthier economy one would expect more funds to be put towards acquisitions, new product lines & expansion but in this tepid & uncertain economy, companies are aiming to increase earnings per share via buybacks. ~50% of the 3.3% growth in earnings in the first quarter was due to equity repurchases. These repurchase plans should be seen as a positive, but they should not be the biggest reason to invest in a stock. Here are two equities that were in the "top ten" of companies buying back stock in the first quarter by dollar volume, but look like good investments outside of their repurchase programs.
Microsoft (MSFT) - Mr. Softie came in at #10 on the list with more than $1.6B used to retire shares in the quarter. Given it has more than $70B in net cash/marketable securities on the books (#2 among S&P companies), it certainly has the funds to continue to repurchase shares in bulk. More importantly, Microsoft's stock just hit a five year high as the equity has picked up momentum recently. UBS thinks the rally still has legs and just raised its price target on MSFT to $40 from $35 a share. Microsoft also just unveiled a new version of its market leading Xbox and has two "cloud" offerings (Office 365 & Azure) that are producing more than $1B annually each in revenues, making Microsoft one of the largest "cloud" software developers in the world. Despite being known as a "dinosaur" among some pundits, MSFT is growing revenues at a ~7% clip which is significantly faster than the overall market. Despite this, MSFT sports a forward P/E of just over 11. It also provides a 2.7% yield and another dividend hike should be announced before the end of summer.
General Electric (GE) - The huge American industrial multi-national was #7 on the list with over $2B worth of stock repurchases. The shares yield 3.2% and the company has almost doubled its dividend payout over the last few years. The conglomerate continues to focus on three business lines - big industrial goods (Ex, Jet Engines), large medical systems and increasingly; energy services. GE is also continuing to lessen the footprint of GE Capital which almost brought down the company during the financial crisis. GE Capital just announced it will pay a $6.5B dividend to its parent. In addition, the company appears open to spinning off parts of GE Capital and has said it would use proceeds for further stock repurchases. Analysts expect earnings to increase ~10% in both FY2013 & FY2014 and the shares go for less than 13x 2014's projected earnings.