10 year results to September 30th 2015

The returns from the Undervalued and Overvalued lists are compared to the 10 year returns in the Globe & Mail univerese of US equity funds.  Without income or management fees the average annual returns of +9.29% and +4.89% would have ranked in the 97th and 42nd percentiles for a spread of 55.

This compares to the 99th and 39th percentile ranks respectively  for 10 year results a year ago.

Valuation of stocks with aggressive buyback programs

Stocks with aggressive buyback programs have little or nothing to show for the money they spent.

Many public companies continued to buyback their shares at a very high level as indicated in this Factset chart

http://www.factset.com/websitefiles/PDFs/buyback/buyback_9.21.15

We compared the stocks in the S&P 500 Buyback ETF (SPYB), of which we cover 66 out of 100, to our universe of  approximately 500 stocks to evaluate what they achieved for the money they have spent.

The bottom line is that it appears that the buyback programs have bought very little benefit, if any.

This table compares the median values of the SPYB stocks to our Universe.

First, the SPYB stocks are undervalued by 7% as indicated by VR or Valuation Return/Risk.  What is the point of spending money to goose your stock price if your stock is remains undervalued ?

Their growth rate (RR, or Reinvest Return) is a percentage point better than average but this likely is entirely attributable to the deductions from book value due to buying back shares above book value (its called 'decimating the denominator' and is good for executive compensation bonuses).

Not shown in the table are the median P/Es which are 13.1x vs 15.1x for the universe!

The result of the higher return and lower P/E is a shorter Payback (PB) for the Buyback stocks, i.e.8.0 vs 8.5 years.  These stocks are cheaper!

It is interested to note that the median target Payback (NM) for all stocks is 103% of the S&P 500's while the Buyback stocks' target is only 95% which suggests lower long term valuations. 

Finally, it is worth noting that the median market cap of the buyback stocks is double that of the and is just over the line into the 4th quartile.  As shown in the preceding post, the 4th quartile market caps have a slightly negative VR so it can't be argued that the lack of demonstrable benefit from the buyback programs is attributable to being big caps.

In short there is no evidence here that they have achieved any benefit from spending all that money on buying back their stock.

October 29th Addendum: Performance

One argument in favor of buyback programs is that the reduction in shares leads to higher eps growth and, hopefully, higher stock prices.  However, this isn't working right now.  This Yahoo graph shows that the SPYB ETF has underperformed the S&P 500 by close to 6% in the last 6 months.

WHERE IS THE VALUE ?

Growth is undervalued by the market today.  The lowest quartile in Reinvestment Return (RR) has a median VR of - 9% while the top quartile median is +11%.  There is little difference across the Yield quartiles but when added to RR, we get an even higher discrimination over the combined IR (Inherent Return) which is RR + YLD

Low Payback shows the best disparity in value of +54% vs +31% for IR

The ratio of Estimate/Normalized earnings  (EM or E/M) shows the best values at the least attractive end of the range while the small Market Caps are more undervalued that Large Caps by 7%.

NB Quartile ranks go from low to high.

Value by Sector is summarized in this table -

The best values are in  Basic Materials, Financial and Industrial Sectors while the worst is the Utilities.