Published:
September 7, 2007
The
correct answer is
(B.) Home Depot (HD)
Yes, Home Depot (HD), the world's
leading home-improvement retailer,
recently announced a $22.5 billion
stock buyback. After all is said and
done, the firm intends to repurchase
about one-third of its outstanding
shares. Home Depot plans to fund the
buyback with money from the sale of
its HD supply business and about $12 billion from
new bonds and cash on hand.
By specifically choosing to
repurchase shares instead of
pursuing other options, Home Depot's
management is sending a clear
message that they believe their
stock is highly undervalued and
makes a compelling investment. Not
surprisingly, Wall Street applauded
the buyback news, sending the shares
up nearly +5% the day following the
announcement on quadruple the
average daily trading volume.
But while the size of Home Depot's
buyback program is noteworthy,
buybacks aren't all that uncommon.
S&P 500 firms have now committed
more than $100 billion to buybacks
in each of the past six quarters -- roughly triple the amount spent just
a few years ago. And considering
corporate earnings are forecast to rise
another +6% this year, all signs
point to even more share repurchases
on the horizon.
But for a buyback to be an efficient
use of capital, the issuer's shares
must be undervalued. The more
undervalued, the greater the rate of
return and the more economic value
provided to shareholders.
Unfortunately, many companies
conveniently ignore this fact. Some
unscrupulous managers use buybacks
as a means to boost temporarily a
stock that is going nowhere. Others
(whose compensation is often tied to
certain profitability metrics) pump
money into buybacks to mask poor
performance and improve the firm's
numbers -- and fatten their own
paychecks.
So, how can you smoke out the good
buybacks from the bad? Start with
StreetAuthority's monthly
Half-Priced Stocks
newsletter. In a recent issue,
Editor Nathan Slaughter dove into
the subject of stock buybacks. In
the process, he outlined a variety
of factors that can help you
determine the true motives behind a
firm's repurchase plan. In addition,
Nathan delivered the exclusive names
of over a dozen stocks that are
buying back stock hand over fist --
all while trading below their
estimated fair value. He also
profiled two of his favorite firms, including one set to
repurchase over 40% of its existing
shares. To learn more about
Half-Priced Stocks, including
how to access this article on share
buybacks, please visit this link.
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