Stock Buybacks: Have These Dow Stocks Been Too Stingy?
Part of the reason that the Dow Jones Industrials have climbed so far in 2013 is that many of its companies have been aggressive about buying back their shares. Even with stock prices soaring, many of the Dow's components have been flush with cash and eager to return it to shareholders in ways that can boost their stock performance and their per-share earnings. Buybacks fit the bill perfectly for that purpose, but some Dow stocks haven't embraced buybacks as much as others. Among them, Verizon , DuPont , United Technologies , and Nike have spent the least on share repurchases over the past 12 months, according to the most recently reported figures from S&P Capital IQ. Let's look at why these companies have cut back and whether it indicates pessimism about their respective stocks going forward.
For Verizon, figures that show it having spent just $153 million repurchasing its shares are incredibly misleading for a simple reason: the telecom giant made a $130 billion commitment to its Verizon Wireless business by buying out former partner Vodafone's 45% stake in the joint venture. More broadly, though, Verizon has rarely been a major repurchaser of its shares, choosing instead to use dividends to return capital to shareholders. Given the record-setting $49 billion in bonds that Verizon issued to help finance the deal, a lack of buybacks certainly doesn't indicate a lack of confidence in the prospects for its business going forward.
DuPont's $1 billion buyback authorization late last year followed a poor performance in 2012, with sluggish performance in the global economy hurting its core chemicals business. That investment early in the year turned out to be a good one, with the stock having climbed almost 40% over the past year on greater enthusiasm about its future prospects. With DuPont making major strategic moves to refocus on its agricultural seed, pesticide, and herbicide business, the company is likely waiting to see how events like its planned spinoff of its performance chemicals business work out before committing cash to further stock repurchases.
United Technologies has historically used stock buybacks to return capital to shareholders, but the pace of those buys fell to just $1 billion over the past year. The main culprit was the conglomerate's $18.4 billion purchase of aerospace parts-maker Goodrich, which led United Technologies to suspend its repurchase program in late 2011 when the acquisition was announced. The move to reduce its buybacks helped United Tech support its bond rating in light of the large amount of debt the company took on to finance the transaction, but as the Goodrich integration proceeded, the company restored half-sized buybacks in 2013 and has said that it hopes to expand those repurchases in the near future.
For Nike, the $1.43 billion it spent buying back its shares is just a portion of the four-year, $8 billion repurchase program it started in September 2012. Nike has a long history of using share buybacks to reduce its share count and boost per-share earnings, helping to foster its substantial growth. More than anything else, the relatively modest amount of its repurchases reflects Nike's small market capitalization in comparison with its much larger Dow counterparts. With Nike stock having soared 56% in the past year, the athletic-products company has plenty of optimism for its future.
Looking at raw buyback figures can often lead to misleading results. It's always best to look beyond the numbers to establish why a company takes a given tack when it comes to their share repurchases. Often, you'll come to a much different conclusion about whether the stock is a smart buy.
Don't settle for just buybacks
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The article Stock Buybacks: Have These Dow Stocks Been Too Stingy? originally appeared on Fool.com.
Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter: @DanCaplinger. The Motley Fool recommends and owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.
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