Two large-cap companies are making waves with announcements that they will be returning billions of dollars in capital to their shareholders over the next several months. While dozens of companies have declared special dividends and share buybacks during the past year, General Electric Company (NYSE:GE) and Time Warner Inc (NYSE:TWX) are unique for their below-market valuations and strong strategic outlooks. It seems likely that these buyback programs could attract significant new investment in these relatively staid stocks. More importantly, they might provide a short-term price pop for investors with tight time horizons.
About General Electric and Time Warner
Based in Fairfield, Connecticut, General Electric is a major industrial, healthcare and financial conglomerate that engages in a wide range of operations in a number of countries around the world. The company makes medical devices, jet engines, power equipment, household appliances, industrial machinery, lighting fixtures, cleaning devices, and compression and transportation devices. It also engages in a variety of financial activities through its General Electric Company (NYSE:GE) Capital subsidiary and owns stakes in several banking firms. General Electric Company (NYSE:GE) earned nearly $15 billion on gross revenues of $146.8 billion in 2012. It employs around 300,000 people.
New York-based Time Warner is an integrated media company that operates a cable provider, produces content and media for television and online consumption, and owns a number of print-media properties. It should be noted that the company is in the process of a restructuring campaign that will see the bulk of its print media holdings spun off into a new public concern known simply as “Time.” After the spin-off, Time Warner Inc (NYSE:TWX)’s principal holdings will include its cable network, the various cable properties that it owns, and a number of other miscellaneous media-related businesses. The company employs about 34,000 people and earned $3 billion on gross revenues of $28.7 billion in 2012.
Terms of the Buybacks
As noted, a number of companies have recently announced buyback or special-dividend plans. However, GE and Time Warner are both significantly undervalued relative to the broader market. In particular, Time Warner Inc (NYSE:TWX) currently trades at an implied discount of 28 percent. For its part, General Electric Company (NYSE:GE) trades at an implied discount of around 15 percent.
Time Warner has indicated that it intends to allocate at least $4 billion to its share buyback program and boost its dividend by nearly a fifth. At its current share-price levels, a $4 billion buyback would represent nearly 10 percent of Time Warner’s current market capitalization. By any standards, this is a huge move that could boost the company’s shares by 10 percent or more in the short term. After factoring in the dividend increase, shareholders who buy into Time Warner Inc (NYSE:TWX) at these levels could earn 11 percent or more on their investments.
In absolute terms, General Electric Company (NYSE:GE)’s plans are even bigger. Although it has not yet provided specific terms, the company has confirmed that it plans to use $18 billion in cash to fund some combination of buybacks and dividend hikes over the coming fiscal year. This represents about 7.5 percent of General Electric’s current market capitalization and could provide a similarly sized return for shareholders in the near term. Since GE shares have been locked in a secular uptrend for the past several months, this move could add to their momentum and provide an even more impressive return over a longer time frame.
Competitors’ Moves
Among immediate competitors of Time Warner Inc (NYSE:TWX) and General Electric Company (NYSE:GE), 3M Co (NYSE:MMM) and DirecTV (NASDAQ:DTV) have both announced buyback or capital-return plans on a similar scale. In fact, DirecTV (NASDAQ:DTV) recently reauthorized a $6 billion share buyback program that it had initiated in April of 2012 and looks to continue putting its cash to work for the foreseeable future. DirecTV (NASDAQ:DTV) has only $1.9 billion in cash so it will have to do the buyback over a larger time frame. However, with quarterly earnings increasing at over 30% year over year, it shouldn’t take too long to come up with the cash. Meanwhile, 3M increased the size of its floating “buyback pool” to $7.5 billion and signaled that it intended to put it to work in a sustained fashion during the coming months. The pool now represents more than 10 percent of the company’s market cap. 3M has $4.5 billion on the balance sheet and an operating cash flow of $5.3 billion adding to the stockpile annually.
Long-term Outlook and Ways to Play
Although Time Warner Inc (NYSE:TWX) has undoubtedly endured some strategic misfires in the recent past, the company remains fundamentally healthy and may well boost its profile with its share buyback program. Meanwhile, General Electric is a known quantity that is often discounted due to its familiarity and conservative management philosophy. However, the company is clearly taking steps to change direction and focus on its core industrial holdings. This cash-return program may well boost its image even further and endear it to shareholders who normally avoid low-beta blue chip stocks.
In sum, the share buyback programs that General Electric Company (NYSE:GE) and Time Warner Inc (NYSE:TWX) recently announced are high-quality offerings that could reward shareholders for their patience and attract a diverse mix of fund managers, retirement investors and short-term traders. Investors who wish to play these deals would be best served by tiered long positions.
The article Big Share Buybacks Will Boost EPS originally appeared on Fool.com and is written by Mike Thiessen.
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