International Business Machines Corp. (IBM), Merck & Co., Inc. (MRK), And Blue Chips with Big Buyback Plans

In order to juice EPS at a time its drug pipeline is under question, Merck & Co., Inc. (NYSE:MRK) announced a huge, $15 billion share repurchase program. The company has no intentions to slow-roll its program, either, pledging to deploy some $7.5 billion in cash for shares just this year. That program could reduce Merck & Co., Inc. (NYSE:MRK)’s share count by some 11% if completed at the company’s current share price.

A big repurchase program by a pharmaceutical company suggests that it sees no better opportunities in R&D or acquisitions than it can find in its own stock. Merck & Co., Inc. (NYSE:MRK) lost patent-protected exclusivity on Singulair, a product which once led as a sales leader for the firm. New generic competition could weaken sales and margins going forward. The company trades at 13 times 2013 guidance, which is lower than the broad market. The S&P 500 trades at 14.5 times forward earnings expectations.

Bank on blue chip buybacks

In the long haul, big repurchases by household names lead to excellent value creation for shareholders, but only if repurchases are completed at a fair price. The last time repurchase interest peaked was in the third quarter of 2007, when companies repurchased nearly $180 billion of their own shares. In the fourth quarter of 2012, companies repurchased only $93.8 billion of their own stock.

If you like a company at the current price, you should only like it more as it repurchases its own shares.

Warren Buffett is the king of finding compounding machines in the form of buybacks. When he announced his position in IBM in 2011, he commented that he would prefer IBM to trade sideways or even fall for the next few years so the firm could use its cash flow to quietly repurchase shares at a price below their intrinsic value. So far, IBM seems to be doing just that.

Buybacks compound the effects of winners and losers alike. Those that have conviction in their undervalued holdings should only love them more as share counts dwindle.

The article 3 Blue Chips with Big Buyback Plans originally appeared on Fool.com is written by Jordan Wathen.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.