Flowserve: Compounding or Destroying Value?

I'm highly skeptical about the economic value of most share repurchase programs. To see why, look at the following graph of the total buyback dollar amount for the companies in the S&P 500, compared to the average price of the index on a quarterly basis:


Source: Capital IQ, a division of Standard & Poor's.

Share buybacks for the S&P 500 accelerated in the second half of 2004, culminating in a sharp spike during the first two quarters of 2007 -- just as the stock market was peaking. Conversely, when stocks traded at bargain prices during the worst of the crisis, share buybacks dried up. Then, as stocks became more expensive during the rally that began in March 2009, companies once more became happy to step up the dollar amounts spent on share repurchases.

Still, not all buyback programs hurt shareholders. In order to praise smart capital allocators and shame those who fritter away shareholder capital, I've decided to evaluate individual share repurchase programs. Today, I'm looking at the new program established by engineering products and services supplier Flowserve (NYS: FLS) .

How much, for how long?
The new $300 million share buyback authorization follows a $300 million program, which is almost complete. The company has placed no other restrictions on when it will buy shares or in what amounts.

How cheap is the stock?
Flowserve's buyback announcement specifically mentions the share price as one of factors that will determine its ability to spend its authorization. That's a shame because the relationship between price paid and intrinsic value will determine whether the share purchases are compounding or destroying shareholder wealth. Just how cheap (or expensive) are Flowserve shares right now? Based on its price-to-earnings ratio, Flowserve trades toward the bottom of the range against four of its competitors:

Pentair (NYS: PNR)


Watts Water Technologies (NYS: WTS)


CIRCOR International




Timken (NYS: TKR)


Source: Capital IQ, a division of Standard & Poor's.

Is this a smart use of shareholder capital?
Flowserve's price-to-earnings multiple currently lies in the bottom half compared with the company's industry peers, the S&P 500, and its own five-year history. With shares trading at 9.1 times its earnings-per-share estimate for the next 12 months, Flowserve's share buyback program looks like a good use of shareholder capital at current prices. It's worth tracking Flowserve, and you can do it with our free application, My Watchlist.

Companies can't misallocate the cash they return to shareholders. The Motley Fool's best analysts have identified great companies that let you decide how to spend your profits in our special free report, "13 High-Yielding Stocks to Buy Today."

At the time thisarticle was published Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.