Cash-Rich Companies Choosing Stock Repurchases Rather Than Dividend Hikes: Part II

by: The Value Investor

This week I will run you through the most important buyback announcements for the week of 21-24 February.

While consumers and governments across the world are strapped for cash, corporations have plenty. Rather than signal long-term trust and pay more generous long-term oriented dividends, many of them have adopted share repurchases to buy back their own stock.

Investors welcome these announcement as they boost earnings per share and provide a lot of support for the share price during the repurchase periods.

Aetna (AET) announced an additional $750 million repurchase program, representing 4.4% of outstanding shares. Over the last five years the insurer has already bought back over 20% of its outstanding shares valued at more than $7.5 billion. In comparison, the health care benefits company pays a mere $220 million per annum in dividends.

GAP (NYSE:GPS) announced a new $1 billion repurchase program, representing roughly 9.1% of outstanding shares. Gap already repurchased about 20% total shares outstanding over the last couple of years, helping to maintain its share price trading in a $15-$25 price range. The size of the program is roughly four times its annual dividend of $250 million dollars.

United Stationers (USTR) announced a $100 million extension of its current repurchase program, which should be enough to repurchase another 8.3% of its shares. The plan is welcomed by investors who received their first dividend in 2011 when the company initiated a $0.13 quarterly dividend, representing a 2% annual yield.

Tower Watson (TW) announced another $150 million in repurchases, effectively retiring 3% of its outstanding shares. The global professional service company has issued a lot of new shares in order to finance its growth over the last couple of years. Total number of outstanding shares went up from 44 million in 2008 to 71 million last year. With shares trading up 50% compared to two years ago, investors grow wary as management seems to have employed a buy high, sell low strategy.

Texas Roadhouse (TXRH) authorized another $100 million repurchase program, enough to repurchase over 8.5% of its outstanding shares. Investors in the full service restaurant chain welcome the move and sent shares 6% higher on the day of the announcement.

Omnicare (OCR) announced a $200 million additional repurchase program, effectively repurchasing another 5% of outstanding shares. The pharmaceutical company made the announcement after shares have hit a 5-year high. The announcement is an acceleration of its current repurchase program which runs at about 1% per annum and is welcomed by investors who receive a mere 0.3% dividend yield.

Limited Brands (LTD) announced a $500 million repurchase program. The apparel company, famous from its well-known Victoria's Secret brand, is planning to repurchase about 3.6% of its outstanding shares.

The plan is in addition to its annual $250 million in dividend payments and comes after a period when Limited's shares have risen from a mere $10 in 2009 to $45 at the moment.

During the last week, these six companies described above announced repurchase plans totaling almost $3 billion, which is roughly four times their combined annual dividend payment, which came in at around $800 million.

Cash-rich companies still refuse to significantly raise long-term dividends, which could send a powerful long-term trust signal. Rather, they use one-time repurchase agreements with far less signaling power as a dispersion tool of excess cash to its shareholders.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.