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When Amgen (NASDAQ:AMGN) reported earnings a few weeks back, the company reported a very surprising stat to most investors. It has spent billions on a stock buyback at shockingly lower stock prices.

The biotechnology firm discovers, develops, manufactures, and markets human therapeutics based on advances in cellular and molecular biology for grievous illnesses.

The other surprising stat was the company reported a $0.29 earnings beat for Q2.

Q2 2012 Highlights

The company reported the following highlights for Q2 2012:

  • Total revenues increased 13 percent to $4,477 million, with 8 percent product sales growth driven by strong performance across the portfolio.
  • Amgen modified its agreement with Takeda to grant exclusive worldwide development rights for motesanib, recognizing income of $206 million in other revenues.
  • Adjusted EPS grew 34 percent to $1.83 due to 23 percent adjusted operating income growth and lower shares outstanding. Adjusted net income increased 12 percent to $1,433 million.
  • GAAP EPS increased 29 percent to $1.61 and GAAP net income increased 8 percent to $1,266 million.
  • Amgen generated approximately $2.2 billion of free cash flow.
  • Four AMG 145 Phase 2 studies have successfully completed and the Company plans to initiate Phase 3 development in early 2013.

Note how the company grew adjusted net income by 12%, but the earnings per share grew by a smashing 34%. With a simple decision to buyback shares, the company considerably grew shareholders wealth in the process.

Guidance

The company guided to the following numbers for Q3 and fiscal year 2012:

For the full year 2012, the Company now expects:

  • Total revenues to be in the range of $16.9 billion to $17.2 billion.
  • Adjusted EPS to be in the range of $6.20 to $6.35.

The Company continues to expect:

  • Adjusted tax rate to be in the range of 14 percent to 15 percent. Excluding the Puerto Rico excise tax, Amgen still expects the adjusted tax rate for 2012 to be in the range of 19 percent to 20 percent.
  • Capital expenditures to be approximately $700 million.

With a market cap around $64B, Amgen trades at around 13x those earnings estimates. This multiple is about in line with the net income growth, but with the huge cash flow being used to reduce outstanding shares the multiple is clearly too low.

Based on that full year earnings guidance, analysts have actually reduced the Q3 earnings numbers. Did Amgen sandbag the full year guidance?

Net Payout Yield Details

The Net Payout Yield (NPY) is the combination of the forward dividend yield and the backwards share repurchase yield. Amgen has one of the highest yields thanks to the huge buyback over the last year.

  • During the quarter, Amgen repurchased approximately 17 million shares of common stock at a total cost of $1.2 billion at an average price of $69.31. This brings the total shares repurchased under its $10 billion authorized stock repurchase program to 122 million at a total cost of $7.6 billion at an average price of $62.75.
  • The Company previously announced that its Board of Directors declared a $0.36 per share dividend for the third quarter of 2012. The dividend will be paid on September 7, 2012, to all stockholders of record as of the close of business on August 16, 2012.

The average diluted shares dropped an amazing 150M shares over last year to end Q2 with 784M shares outstanding. That amounts to a share reduction of 16%

Conclusion

Amgen is a prime example of what happens when a buyback goes right. Shareholders are now seeing considerably higher earnings per share thanks to the major reduction of shares outstanding.

The company was still loading up on shares during Q2 at an average price of $69. Investors should watch to see if the management team still sees the current price of $83 as a good value. With the strong cash flow and likelihood that earnings again smash estimates, don't be surprised if the company keeps buying with the $2.4B still left on the authorized program.

Source: Amgen: When Buybacks Work

Additional disclosure: Please consult your financial advisor before making any investment decisions.