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

by: The Value Investor

This week I will run you through the most important buyback announcements for the week of 28 February till 2 March.

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

Nordson (NASDAQ:NDSN) announced an additional $100 million repurchase program, enough to retire 2.9% of outstanding shares. The manufacturer of testing and inspection equipment made the announcement after shares are close to their all time high of $59. The plan is welcomed by investors who receive a mere 0.9% dividend yield.

VMWare (NYSE:VMW) expanded its repurchase program by another $600 million. The provider of virtualization solutions announced its intention to retire 1.4% of its shares after shares have risen from lows of $25 in 2009 to $100 per share, at the moment. The plan was initiated to offset the dilution from VMWare's equity plans to key employees. The company currently pays no dividend.

Principal Financial Group (NYSE:PFG) announced a new $100 million repurchase program. The provider of retirement savings and investment products will effectively retire 1.2% of outstanding shares in addition to its generous 2.6% dividend yield.

Dillard's (NYSE:DDS): The apparel and home furnishing retail business announced a $250 million repurchase program which represents a massive 8.1% of its outstanding shares.

The company has followed a very sensible repurchase strategy. Over the last two years it repurchased approximately 20 million shares at prices as low as $20 in 2010. In total the company retired 27% of its outstanding shares already. At today's share price of $60 the new plan would allow the company to repurchase another 4 million shares.

Mentor Graphics (NASDAQ:MENT) announced a $200 million repurchase program. The supplier of electronic design automation and system software announced its intention to retire 12.1% of its outstanding shares. This is a welcome surprise for investors who do not receive dividends and have seen some dilution in recent years due to equity incentive plans for its key employees.

XL Group (NYSE:XL) the global re-insurer providing property insurance has announced a new $750 million repurchase program which would be sufficient to repurchase 11.4% of outstanding shares.

The timing of the repurchase seems sensible. In 2008, the company issued 100 million new shares at $27 per share when it ran into financial trouble. After the financial situation has stabilized, the company now plans to retire 35 million shares at today's level of $21

On top of that, the company pays out a 2.1% dividend yield.

During the last week, these six companies described above announced repurchase plans totaling almost $2 billion, which is roughly four times their combined annual dividend payment, which came in at around $500 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 their shareholders.

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