3 Strong Companies Investing in Themselves - Investment Ideas
22 Janeiro 2012 - 10:00PM
Zacks
It's no secret that corporations are sitting on huge piles of cash
these days. In fact, by the latest count non-financial US companies
have over $2 trillion in cash and other liquid assets on their
books.
It's understandable that companies are still a
little gun-shy in deploying that cash after the Great Recession.
But with money market funds and Treasury bills paying paltry
returns for the foreseeable future, businesses need to find other
places to put all that dough to work.
Ideally, a company should use its capital to
maximize long-term value for their shareholders. But unfortunately
some managers understand this better than others. Many corporate
executives are more concerned about empire-building than producing
high returns on capital and often make reckless decisions with
shareholders' money.
Decisions, Decisions
There are plenty of uses for a company's excess
cash to try and generate strong returns for shareholders. They
could plow it back into the business to fund growth, acquire other
companies, or distribute it to shareholders through dividends.
Or the company could invest in itself; that is,
buy back shares.
Investing in Themselves
When a company announces a stock buyback, it's a
powerful signal to investors that management is confident in the
long-term outlook of the company and that the share price is
fundamentally undervalued.
And when the company actually buys back its shares,
it has a direct benefit in that it reduces the number of shares
outstanding. This means that earnings are divided among fewer
shares. In other words, your piece of the pie just got bigger.
Use Caution
Stock buybacks don't always add value, however. If
a company commences a share repurchase and shares go down in value,
clearly it's not a good use of shareholders' cash. The money would
have been better allocated elsewhere to generate returns for
shareholders.
So make sure you look at the underlying business
before investing in a company, because all the buybacks in the
world won't save a company headed off a cliff.
3 Financially Solid Companies Buying Back
Stock
I've highlighted 3 companies below who have been
buying back significant amounts of their shares outstanding. And
because each one has a strong cash balance and no long-term debt,
they're well-positioned to continue buying back stock in the
future:
Bed Bath & Beyond (BBBY)
Cash & Securities to Total Assets: 26%
Long-term Debt to Total Assets: 0%
Bed Bath & Beyond is a home furnishings
retailer with over 1,000 stores in the United States and
Canada.
Since December 2004, Bed Bath & Beyond has
spent $3.7 billion buying back its stock, including $859 million
through the first 9 months of 2011. And total shares outstanding
has decreased by 13% since 2007. That's one way to grow EPS.
Insperity (NSP)
Cash & Securities to Total Assets: 42%
Long-term Debt to Total Assets: 0%
Insperity is a leading Professional Employment
Organization (PEO) that provides a wide array of Human Resource
solutions to small and mid sized firms.
The company's sizeable cash position and zero debt
has allowed it to buy back shares of its common stock. In the third
quarter of 2011 alone, the company bought back over 668,000 shares
of stock (~3% of shares outstanding). As of September 30, 2011, it
was authorized to repurchase an additional 1,352,089 shares under
its share repurchase program.
Accenture plc (ACN)
Cash & Securities to Total Assets: 33%
Long-term Debt to Total Assets: 0%
Accenture provides consulting and technology
services to clients around the globe. With very little fixed assets
and capital expenditure requirements, the company is able to return
a substantial portion of its cash flow to shareholders through
stock buybacks and dividends.
On top of paying a dividend that yields 2.4%, the
company has been aggressively buying back its shares outstanding.
From fiscal 2007 through fiscal 2011, the company generated $13.6
billion in free cash flow. It spent a whopping $12.5 billion of
that buying back its stock.
And in its latest 10-Q, the company stated that it
"intend[s] to continue to use a significant portion of cash
generated from operations for share repurchases during the
remainder of fiscal 2012."
The Bottom Line
With the economy improving and cash representing
the highest percentage of total assets since 1959, it's time
companies start putting that money to good use to generate decent
returns for shareholders. One way is to invest in itself and buy
back its shares.
That is, of course, if the company is worth
investing in.
Todd Bunton is the Growth & Income Stock
Strategist for Zacks.com and Co-Editor with Steve Reitmeister of
the Reitmeister Value Investor that snaps up discounted value
stocks and sells them after the market realizes their true worth
for long-term gains.
ACCENTURE PLC (ACN): Free Stock Analysis Report
BED BATH&BEYOND (BBBY): Free Stock Analysis Report
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