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The 2012 buyback blitz continues. In October, dozens of companies announced or extended buyback plans, including International Business Machines Corp. (NYSE:IBM), which said on October 30 it would increase its stock repurchase fund by 75% to $11.7 billion. The company has spent $3 billion on share repurchases so far this year. The increase represents an additional $5 billion in stock, or about 2% of the company's market value. Joining IBM at the billion-dollar level is TRW Automotive Holdings Corp. (NYSE:TRW), which pledged to spend $1 billion to buy back stock (18% market value) over the next two years.
In July, we wrote about the earlier group of companies buying back their own stock. At that time, American Greetings Corporation (NYSE:AM), Baxter International Inc. (NYSE:BAX), CBS Corporation (NYSE:CBS), Lockheed Martin Corporation (NYSE:LMT), News Corp (NASDAQ:NWS), RadioShack Corporation (NYSE:RSH), Travelzoo Inc. (NASDAQ:TZOO), and Visa Inc (NYSE:V) had all pledged at least $1 billion in repurchase plans.
Buybacks have numerous benefits. They reduce assets on the balance sheet, which translates into higher return on assets and return on equity -- all without any change in earnings. They also drive down that ubiquitous measure, the price-earnings ratio, which will make it appear that a company is less expensive than it was before the buyback.
As far as benefits for the shareholder go, buybacks are usually considered a good thing when the stock is selling at a material discount to its intrinsic value. As a general rule, they tend to boost investor confidence. Matthew Stover, an analyst with Guggenheim Securities, was quoted in Crain's Detroit Business commenting on the TRW buyback, which was larger than expected. "Management and the board took a simpler and larger approach, which is ultimately more attention-grabbing and underlies their confidence in the outlook for the company," he said.
One other reason buybacks have been the rage in 2012 is the uncertainty around the Bush-era tax cuts that could end this year. Those taxes cap both the long-term capital gain rate and stock dividend rate at 155. Buybacks are taxed at the capital gains rate.
Like IBM, American Capital Agency Corp. (NASDAQ:AGNC) took advantage of the closed markets last week, pledging $500 million (12% market value), in a repurchase program. AGNC specified that it would only buy shares when they are trading below book value.
Aspen Insurance Holdings Limited (NYSE:AHL) and WABCO Holdings Inc. (NYSE:WBC) have each pledged $400 million, representing 18% and 12% market value, respectively. Aspen made the announcement in its earnings call in mid-October, while WBC made its announcement while the markets were closed for Hurricane Sandy.
Earlier in October, Dana Holding Corporation (NYSE:DAN) said it would spend $250 million (13% market value) on a buyback program while Zynga Inc (NASDAQ:ZNGA) and Rent-A-Center Inc (NASDAQ:RCII) said they would spend $200 million each, representing 11% and 10% market value, respectively. It's the first time Zynga has ever done a repurchase program and it was clearly done to boost investor confidence as the company shares have fallen from a 52-week high of $15.91 to yesterday's close of $2.24. RCII announced its buyback plan at the same time it said its third-quarter earnings would be less than the consensus estimate.
The largest market value buyback at 79% belongs to Willis Lease Finance Corporation (NASDAQ:WLFC), which announced a five-year $100 million buyback plan. The announcement was made in early October and as of mid-month, the company had repurchased $6.1 million worth of shares.
This article by Bristol Voss originally published on Minyanville.
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Disclaimer: The views represented on this blog are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.