After the close on Wednesday, CVS Caremark Corporation (CVS) announced a massive $6B buyback. While the buyback is significant in size and worthy to report on the financial media outlets, the relative amount might not be enough to move the stock.
The company is a leading provider of pharmacy healthcare services in the U.S.
The company has a $61B market cap, so even using the full buyback authorization in one year would only amount to 10% of the outstanding shares. According to Bloomberg, the CFO told analysts on September 5th that the plan is to repurchase $3-4B annually.
Net Payout Yields
Based on that CFO plan, the buyback would amount to at least 5% of the outstanding shares annually. Combined with a 1.4% dividend yield, CVS would have a 6.4% Net Payout Yield (NPY).
This yield isn't bad, but based on the top NPY stocks each month (see September list here), it falls way short of a compelling amount. Also, the stock trades at roughly equal to the earnings growth rate so the stock isn't extremely cheap for the company to spend cash at this rate.
The below chart highlights the NPY over the last five quarters:
All Time Highs
The stock is trading right at the all-time high, making one question the appropriateness of this buyback plan, especially as CVS appears willing to spend $3-4B annually regardless of the valuation.
That chart does not scream stock buybacks.
Conversely, Northrop Grumman (NOC) announced an increase in the company's outstanding buyback authorization to $2B. While significantly below the $6B announced by CVS, on a relative value, the amount easily exceeds the CVS plan.
Northrop only has a market value of $16.5B, meaning that this buyback will exceed 12% of the outstanding shares at the current market cap. More importantly, the company has a history of pushing through these buybacks to the extent that it ranked 7th in the September NPY list.
Don't forget that Northrop also has a higher dividend yield at 3.3% as well.
Unsurprisingly for most investors, the headlines and media outlets provide very little substance on these announced buybacks. While $6B sounds significant, in the case of CVS, the money might be spent better somewhere else. With dividends hot this year, why not just push a portion of this buyback amount into a higher dividend. Better yet, set the buyback conditional on lower stock prices.
For now, Northrop provides the better relative value regardless of the announced buyback amount. In the end, the percentage of shares removed from the outstanding bucket matters the most.
Additional disclosure: Please consult your financial advisor before making any investment decisions.