3 Companies (Still) Buying Their Own Shares

Collectively, share repurchases have come to look like a poor signal for investors because most companies abandoned them at just the wrong time. However, individually, the few companies who continue to buy back shares seem all the more attractive.

When companies earn cash beyond what they need to fund growth or pay off debt, and beyond what they wish to hoard, they can send the money to stockholders. The simplest way to do that is through dividends, but companies can also repurchase, and thus retire, outstanding shares. By reducing their share count, companies increase their earnings per share, theoretically making remaining shares more valuable. Absent taxes, dividends and share repurchases should benefit shareholders equally, but because dividends are taxed and repurchases aren't, the latter should be a better deal -- again, theoretically.

In reality, companies are loathe to cut their dividends, but they seem all too willing to stop spending on repurchases. During the financial crisis of the past two years, company sales fell 20% from peak to trough and earnings briefly disappeared. Dividends held up relatively well, falling 17%, mostly because of big bank cuts. Stock repurchases from their high quarter to their low plunged 86%. That's a big difference. Investors who reinvest their dividend payments were largely able to buy even more shares when prices were low. However, repurchase plans have come out looking like buy-high, bail-low schemes.

That said, the companies listed below deserve credit for continuing to repurchase shares through the stock market downturn. On one hand, I'd be more impressed with dividends. On the other, these companies exhibited commendable financial strength and shareholder focus.

As a health insurer providing mostly workplace plans, Aetna (AET) is losing customers to unemployment. At the same time, medical costs are rising. Last month the company trimmed its 2009 earnings guidance. Analysts now expect earnings per share to fall 30% this year before returning to moderate growth next year. Shares have lost more than 45% over the past two years, but now seem suitably cheap at less than 12 times forward earnings. The company is on pace to spend more than $780 million on share repurchases (net of issuances) this year. That's well below the $1.7 billion it spent on average over the past three years, but it's still more than 6% of the company's stock market value.

DirectTV (DTV) is America's largest satellite television company and its second-largest pay TV company, with 18.5 million U.S. subscribers and 4.3 million in Latin America. It's also one of the fastest growing companies in its industry. Sales this year are expected to increase 9%. The company is only modestly indebted and should generate more than $2.1 billion in free cash this year. In the first three quarters, it spent $1.6 billion on share repurchases, versus $1.8 billion a year earlier. The stock is ambitiously priced at about 23 times forecast 2009 earnings, but earnings are expected to jump more than 70% next year.

AutoZone (AZO) sells replacement parts for cars, mostly to do-it-yourselfers, through retail shops, rather than mechanics at garages. The perfect backdrop for such a business is a car-obsessed culture where drivers suddenly stop buying new. The U.S. has more cars than registered drivers, and new car sales this year are expected to fall short of 11 million vehicles, the slowest pace since the early 1980s. Accordingly, profits for AutoZone are expected to increase 11% this year. They would be rising faster if not for customers shifting from high-margin discretionary items to lower-margin maintenance items, but investors aren't complaining. Shares are up nearly 50% in a year. Year-over-year growth comparisons will become more difficult next year, but shares sell for just 11 times earnings. Management went hog wild on shares during the company's fiscal year ending Aug. 29, spending $1.3 billion, or about 17% of the stock market value.