Companies use share repurchase to reduce the number of shares on the market, thus increasing the value of the remaining shares or supporting the share price. Once the shares are repurchased, the company can either retire the shares or keep them as treasury stock. As a conservative investor, I like to see companies that repurchase shares when the price is undervalued or depressed and when free cash flow continues to grow.
5 Dow stocks are reviewed below for their stock buybacks activities in relation to their share price and free cash flow.
International Business Machines Corp. (NYSE:IBM), a leader in the IT industry, has a defensible position in enterprise software, services, and hardware and enjoys a wide economic moat. The company’s free cash flow remained stable throughout 2011 and 2012. International Business Machines Corp. (NYSE:IBM)’s share price has continued to increase since 2009, and has been trading in a range throughout 2012. The share buyback activities have increased throughout 2010 and have started to decline after reaching its top in late 2011. International Business Machines Corp. (NYSE:IBM)’s management had been doing a great job repurchasing the shares at the right time when the shares remained undervalued.
Intel Corporation (NASDAQ:INTC), the world’s largest semiconductor chip maker, had resumed its share buyback in early 2011. Intel Corporation (NASDAQ:INTC)’s buyback activities peaked in late 2011 and its share price topped in early 2012. While Intel Corporation (NASDAQ:INTC) is in an industry requiring intensive capital investment and is catching up in the mobile end, it makes sense for Intel Corporation (NASDAQ:INTC) to preserve its capital now and reduce its buyback plan.
The Coca-Cola Company (NYSE:KO) is the king of non-alcoholic beverage providers. The Coca-Cola Company (NYSE:KO)enjoys one of the widest economic moats in any industry. The Coca-Cola Company (NYSE:KO)’s free cash flow continues to increase steadily since 2009, with a short-term pull back in early 2011. While The Coca-Cola Company (NYSE:KO)’s share price continues to climb since early 2009, The Coca-Cola Company (NYSE:KO)’s buyback activities have only picked up since early 2011 and had started to fluctuate after peaking in late 2011. Despite the increasing free cash flow, management did not increase its share repurchase beyond the top 2011 level, as the share price continues to advance.
The Procter & Gamble Company (NYSE:PG), a leading global household and personal-care firm, has one of the strongest portfolios of well-known brands. Despite the improving free cash flow, The Procter & Gamble Company (NYSE:PG)’s buyback plan remained relatively flat in early 2013, whereas its share price continues to increase in early 2013.
Unlike the other 4 companies, the free cash flow for Exxon Mobil Corporation (NYSE:XOM), the largest publicly traded international oil and gas company in the world, has been declining since late 2011. However, Exxon Mobil Corporation (NYSE:XOM) had maintained its share repurchase level since then. Exxon Mobil Corporation (NYSE:XOM)’s share price had only gained 2.58% in the past 5 years, while the Dow Jones index had increased 19.37%. Exxon Mobil Corporation (NYSE:XOM) management continues to face a tough task of increasing shareholder value with declining free cash flow.
This article only gives a quick look at these 5 companies’ buyback activities in relation to their share price and free cash flow in the past 5 years. Investors need to do further due diligence and research to identify the full picture of management’s efficiency. With the exception of Exxon Mobil Corporation (NYSE:XOM), all of these companies did not increase their share buyback plans significantly, despite their strong free cash flow. What does this imply? My best guess is that the management of these 4 companies do not perceive their companies to be undervalued, or management is preserving capital for better use. For Intel Corporation (NASDAQ:INTC), it makes sense to preserve capital. For the rest, time will tell if management made the right call by not boosting their buyback plans now.
The article Are These Dow Companies Buying Back Wisely? originally appeared on Fool.com.
Nick Chiu has a position in Intel. The Motley Fool recommends Coca-Cola, Intel, and Procter & Gamble. The Motley Fool owns shares of Intel and International Business Machines. Nick is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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