Amgen borrows to fund stock buyback
With their stock prices struggling despite strong profit growth, more big-name companies are trying to set an example for investors: They’re channeling cash into buybacks of their own shares.
That strategy lit a fire under the stock of Thousand Oaks biotech giant Amgen Inc. on Monday, after the company launched a plan to buy back up to $5 billion of its shares — about 10% of the total outstanding — over the next month.
Amgen shares jumped $3.26, or 5.9%, to $58.43 in the biggest one-day gain in 17 months.
Though some companies are drawing on their cash hoards to repurchase stock, Amgen is going a step further: Citing low interest rates, the firm borrowed $6 billion via bond sales Monday to finance its share-buyback program.
The company’s higher debt load triggered immediate downgrades of its credit rating by two of three major rating firms. But some Wall Street analysts said the lower ratings were worth it for the message Amgen is trying to send — that its stock is undervalued.
“It’s a signal of confidence in their business,” said Mark Schoenebaum, an analyst with ISI Group in New York. “It’s very deliberate; they’re taking on more debt because they can borrow money on the cheap, even with the credit downgrades.”
Corporate stock buybacks overall have risen to the highest level since just before the 2008 financial crisis, said Howard Silverblatt, senior analyst at Standard & Poor’s in New York.
Companies in the blue-chip S&P 500 index bought back $109.2 billion in stock in the second quarter, up 41% from a year earlier, Silverblatt said. The second-quarter figure was the most since the first quarter of 2008.
Stock buybacks can benefit shareholders in two ways: First, a company’s purchases may help boost the stock’s price in the market. And second, if the number of shares outstanding is reduced, future earnings are spread over a smaller number of shares. In theory, that makes the stock more valuable.
With the S&P 500 index up just 0.3% year to date, while earnings of the companies in the index are expected to be up about 17% for the year, executives can argue that the market is under-appreciating their shares.
Buybacks also help companies blunt criticism that they’re sitting on too much cash and should be putting it to work in the business or back into the market.
Many companies also have raised cash dividend payments to shareholders this year. Dividends paid by the S&P 500 firms rose to $59 billion in the second quarter, up 17% from the year-earlier period, Silverblatt said.
Amgen this year began paying dividends for the first time, with a quarterly payment of 28 cents a share Sept. 8. The annualized dividend yield on the stock is about 1.9% as of Monday’s closing price.
Amgen’s chief financial officer, Jonathan Peacock, reiterated to investors last month that the company intended to return more than 60% of annual net income to shareholders over the next few years. The company plans to “increase the dividend meaningfully over time,” he said.
Though the stock-buyback plan came sooner than analysts had expected, it’s still “fairly in line with the company’s strategy to really return a lot of cash to investors,” said Eric Schmidt, an analyst with Cowen & Co. in New York.
That’s a big change for Amgen: The company was a hot growth name in the 1990s, when its stock zoomed from $1.02 at the start of that decade to $60.06 at the end. But the share price has made no net progress since 1999 as the company’s growth has slowed and investors have been less willing to pay up for drug stocks in general.
Amgen has faced declining sales of its anti-anemia drugs even as sales of its cancer drugs rise. The company also has been under civil and criminal investigations into possible improper billings for some of its drugs.
Amgen remains highly profitable. Excluding one-time charges, including for legal settlements, it earned $1.28 billion, or $1.40 a share, on sales of $3.9 billion in the third quarter. But both sales and per-share earnings were up a modest 3% from a year earlier.
The company last month cut 380 people from its global research and development staff, or about 6% of the total, as part of a restructuring.
Before Monday’s jump, Amgen’s shares had been flat on the year. The stock fell 3% in 2010 and 2% in 2009 even as the broad market rebounded.
At $58.43 a share, the stock is priced at about 11 times analysts’ mean earnings-per-share estimate of $5.30 for 2011. The average price-to-earnings ratio of companies in the S&P 500 index is about 13.
Amgen is taking a different approach from that of many companies with its buyback plan: Instead of purchasing shares in the market over time, it set a specific buyback price range of $54 to $60 a share via a so-called modified Dutch auction tender offer.
Under the plan, shareholders will say how many shares they want to tender and at which price within Amgen’s range. Based on shareholders’ tender offers, Amgen will determine the lowest price needed to buy a total of $5 billion in stock by Dec. 7. All shareholders will get the same price.
In the near term, the tender offer “is going to increase [upward] pressure on the stock,” Silverblatt said. But after the tender is completed, the risk is that the upward pressure ends, he said.
Still, the $5-billion tender offer accounts for just half the $10 billion in total buybacks that Amgen’s directors authorized last month.
Though the stock market cheered the tender offer announcement, credit rating firms Moody’s Investors Service and Fitch Ratings were less enthused because of Amgen’s decision to take on more debt.
Moody’s cut its rating of Amgen to Baa1 from A3, while Fitch lowered its rating to BBB from A-. The new ratings still are investment grade, but are edging closer to what would be considered “junk” grades — Ba for Moody’s and BB for Fitch.
Moody’s said its decision was based on Amgen’s “more aggressive financial policies, expected to result in a large increase in debt over the next several years.”
The borrowing binge “diminishes the company’s financial flexibility and credit quality from a bondholder’s perspective,” said Carol Levenson, research director for bond research firm Gimme Credit in Chicago.
Even so, she said, the new debt isn’t enough “to raise Amgen’s borrowing costs to the point where it negates the earnings-per-share benefit” of the buyback.
An Amgen spokeswoman said the company intended “to maintain a solid investment-grade credit rating.”
Moody’s noted that Amgen had almost $18 billion in cash on hand as of Sept. 30, offsetting its rising debt load.
