Saturday, 24 December 2011

Application of Level I - Retailers may return some cash to investors in 2012

Share repurchase are extensively discusses in Corporate Finance in the CFA Level I curriculum. The effects of share repurchase, buy backs, the methods of doing so, paying dividend in cash or buying share from that amount, the effect on ratios, stock splits, stock reverse splits, negotiations, dutch auctions etc. are narrated well in the readings. Following article from CNBC requires basic understanding of share repurchase to be apprehended well. 
With excess cash on hand from years of cautious spending and slower store growth, retailers in 2012 will focus on returning capital to investors via share buybacks and dividends, according to a Credit Suisse report.
  • A Home Depot store in Edmond, Okla.
    By Sue Ogrocki, AP
    A Home Depot store in Edmond, Okla.
By Sue Ogrocki, AP
A Home Depot store in Edmond, Okla.
The firm's analysts estimate that share buybacks will reach $36.2 billion next year. That's a slight decline from $37.4 billion in 2011, but well above $20.7 billion in share repurchases seen in 2008.
While capital spending is expected to increase, it will be nowhere near peak levels of 2006-2007.
  • Beyond share buybacks and dividends, retailers are also expected to focus on international growth, e-commerce, marketing programs (including loyalty programs), and remodels.

Offering automotive parts retailer AutoZone as an example, the report underscores that buybacks work best when combined with strong company fundamentals — supporting stock through lower earnings years and amplify earnings improvement in the better years.
For 2012, the report calls Home Depot and Lowe's the most interesting names in the retail space.
"While these names do not have the highest yields in the segment, buybacks can support earnings today, while the housing market remains challenging," says the report. "In the long term, if one believes in a housing recovery and that these companies can deliver upside to margins, the higher earnings combined with the years of buybacks should lead to much stronger [earnings per share] growth and strong stock performance."
Credit Suisse analysts also expect to see significant returns of capital for shareholders from department stores.
Macy's could buy back about $1 billion of stock in 2012 and double its annual dividend to $0.80 from $0.40, says the report.
Kohl's is also seen increasing its dividend, which was initiated for the first time ever in 2011, and buying back about $800 million in stock next year.
In addition, Dillard's and Saks "both will have capacity to return meaningful amounts of capital in the form of share repurchases and dividends in the coming year," says the report.
Strong outlooks and the financial flexibility put CVS and Kroger in a good position to continue returning cash to stockholders for the foreseeable future. "We estimate they should buy back 7% to 8% of their current market capitalization in 2012," says the report.
Just this week, CVS announced a 30% increase in its quarterly dividend.
Equipment suppliers are viewed as most likely to actively repurchase shares in the near-term, with International Game Technology taking the lead. According to the report, every $50 million of stock repurchased could add $0.01 to EPS for the company.
"Earlier this year, the company announced a new $500 million share repurchase program, and with $1.3 billion in free cash flow through fiscal 2013, management appears eager to return cash to shareholders, particularly as fundamentals are improving," says the report.
However, retailers with high cash flow yields but weak fundamentals may not benefit from buybacks. Among them, Best Buy, GameStop, Sears, Staples, and Bon-Ton Stores.
"While buy backs may support EPS in the near term, the stocks may not be rewarded if the companies cannot demonstrate net income growth," says the report.

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