Johnson & Johnson (JNJ), Cisco Systems, Inc. (CSCO), AT&T Inc. (T): 3 Successful Buyback Programs

AT&T Inc. (NYSE:T): Freeing up cash flow

AT&T Inc. (NYSE:T), the largest provider of telecommunications services in the U.S., bought back $12.7 billion in stock last year; a huge 6.3% of its market cap. One thing that stands out about this buyback is that some of it does need to be financed. And a look at the balance sheet and cash flow statement shows that it is indeed being financed by debt. But wait. Before we chalk it up as an irresponsible buyback, let’s look a little deeper. AT&T Inc. (NYSE:T) only started buying back stock this last year and its cash flow has been growing substantially.

In fact, operational cash flow has been growing faster than debt since at least 2008, which has driven down this important ratio. Although some of this buyback is clearly being financed, AT&T Inc. (NYSE:T)’s growing income stream will smooth it over.

AT&T Inc. (NYSE:T)’s reason for buying back stock is very different from that of the other two companies. Both Cisco and J&J were repurchasing at a substantial discount. AT&T was above fair value through 2012, but here is the important takeaway: telecoms often see common stock as a bond obligation. This is because of their traditionally high dividends. Management was buying back stock to reduce the company’s dividend obligation without actually cutting the per-share distribution.

When the dividend yield on a common stock exceeds the company’s average cost of debt, many telecoms will choose to “retire” the common stock as opposed to the debt from a cash flow perspective. AT&T Inc. (NYSE:T)’s stock yielded well above 5% for much of 2012. Considering that much of the company’s debt is clustered below a 4% Yield To Maturity, this buyback is a no-brainer.

Conclusion

Not all buybacks are created equal. And while most of them in the last few years probably haven’t added much value, some really have. Whether it’s for buying stock at a discounted price or for common stock obligations, buybacks do sometimes work.

But a good buyback program alone does not make a company worth buying. It is only a piece of the research. Investors must be diligent and look at the fundamental big picture before putting their money to work.

Sources:

All above charts by author, data by Morningstar

“Fair Value” data by FAST Graphs and is a combination of the Graham Number and PEG Ratio, depending on the company’s growth characteristics.

The article 3 Successful Buyback Programs originally appeared on Fool.com and is written by Casey Hoerth.