The term 'share repurchase' is one that fetches a lot of investors' attraction. Recently, some conglomerates announced shares repurchase programs. One such conglomerate is 3M Company (MMM), which is one of the biggest conglomerates in the world. In the second quarter of fiscal year 2013, the company repurchased shares of $1.2 billion, and it will continue its repurchase program. Let's find out this program's impact on 3M's EPS and take a look at other companies that have announced share repurchase programs this year.
In the first quarter of fiscal year 2013, 3M Company repurchased shares for $805 million and in the second quarter it purchased shares for $1.2 billion. For the full year 2013, the company has given a share repurchase guidance range of $3.5 billion - $4.5 billion. We assume that the company will repurchase shares for $4 billion, a mid-value, for this whole year. Combining the amount for which the shares were repurchased in the first and second quarter, 3M Company repurchased shares for $2.005 billion in the first half of this year, and it has $1.995 billion left in its share repurchase program guidance.
Let's assume that the company will repurchase the shares for the second half of 2013 at the current market price of around $118. For $1.995 billion, it would buy around 16.90 million shares in the second half of this year. 3M Company had 683.47 million shares as on June 30, 2013. Hence, by the end of the second half, the number of outstanding shares will reduce to 666.6 million.
We are discussing two possible scenarios as the effect of this repurchase program. In the first scenario we are considering net income in the second half of 2012 to be constant for the second half of 2013. In the second scenario we are assuming, year over year, growth rate in net income of second half of 2012 to be constant for net income in second half of 2013.
In this case we assume net income in the second half of 2012 to be constant for the second half of 2013. For the second half of 2012, 3M Company reported net income of $2.15 billion. With this net income for the second half of 2013 and 666.6 million shares, it would result in EPS of $3.22. In the first quarter the company announced EPS of $1.61 and in the second quarter it reported earnings of $1.71 per share. Combining our estimated EPS with those of first and second quarter, results in EPS of $6.54 for this year.
In the second half of 2012, the company's net income grew by 5.38% from the second half of 2011. Considering this growth rate to be constant for the second half of 2013, the net income would be $2.26 billion. With the above estimated shares of 666.6 million and this net income, the EPS of the company would be $3.4. For the first half of 2013, the company registered EPS of $3.32, combination of EPS in the first quarter and second quarter, which when combined with our estimated EPS would result in total EPS of $6.72 for 2013.
In 2012, the company reported EPS of $6.32. As per scenario 1, the estimated EPS for this year will be $6.54, which represents growth of 3.4% from last year's EPS, if the net income is constant. Whereas in scenario 2, we estimated EPS to be $6.72, which is a significant growth of 6.32%, from last year's EPS of $6.32. Consequently, we expect the share repurchase program to be a robust growth driver for the EPS of the company.
Repurchase program continues
The company's biggest rival, Avery Dennison (AVY), is also betting on increased EPS from its share repurchase program.
Last year, Avery announced an agreement to sell its office and consumer product business to CCL Industries, a packaging solutions company, for $500 million. On July 1, 2013, it completed the sale agreement and Avery received $400 million. Avery is expected to use this amount for share repurchase, reducing debt, and pension payment. However, the company did not disclose the details of the duration of the repurchase with this $400 million.
In the first half of this year, the company repurchased 3.5 million shares for $149 million. We expect that Avery will repurchase shares at the same pace for the whole year 2013 so it should repurchase 7 million shares for $298 million.
In 2012, the company's net income was $215 million with 99.92 million outstanding shares, resulting in EPS of $2.15. The company's net income grew by 13.3% year over year last year. Assuming this growth rate for this year, the net income is expected to be $243.59 million this year. Assuming the company purchases 7 million shares in 2013, the total number of outstanding shares will reduce to 92.92 million. With net income of $243.59 and 92.92 million shares, the EPS this year is expected to be $2.62. This estimated EPS is in line with the company's guidance of around $2.60 per share in this year. The estimated EPS of $2.62 is a significant year over year growth of 21.86%.
Buyback plan of other major competitor
Another competitor of 3M Company is Cintas (CTAS), which announced a share buyback plan of $500 million on July 30, 2013. This follows a similar buyback plan of $500 million announced in October 2011. The company has completed share buyback worth $348.9 million by the end of July 2013 and has a remaining $151.1 million from the old program. Thus, together with the new program, the company has a total buyback authorization of $651.1 million. The company has not announced the date for the expiration of the share buyback program, announced in July 2013.
In the 21-month duration from Nov 2011 to July 30, 2013, the company repurchased 8.6 million shares under its earlier share repurchase program. Cinta's fiscal year 2014 will end in May 2014, so we assume the company will continue this pace of buyback for the next ten months, ranging from July 2013 to May 2014. Thus, Cintas will repurchase 4.09 million shares in the next ten months. The company had 122.32 million outstanding shares as on June 30, 2013. After the repurchase in fiscal year 2014, these outstanding shares will reduce to 118.23 million.
Cintas net income increased around 6% year over year to $315 million in fiscal year 2013. If we assume this growth rate to be constant, the company is expected to generate $334 million in fiscal year 2014. With 118.23 outstanding shares and net income of $334 million, Cintas' EPS is expected to be $2.82 for fiscal year 2014. The company's EPS was $2.52 in fiscal year 2013. The repurchase program is expected to increase this EPS by 11.9%, thereby providing a boost to the stock price.
The above discussed scenarios lead us to conclude that the share repurchase program of 3M Company is worthwhile to consider. According to both the conventional and growth scenarios, the EPS is expected to increase, which leads us to advise investors to buy this stock.
Additional disclosure: Fusion Research is a team of equity analysts. This article was written by Shweta Dubey, one of our research analysts. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.