Trader Talk

Corporate buybacks feed stock rally's momentum

Adam Jeffery | CNBC

Capping a big year for buybacks on Tuesday night, MasterCard announced a 10-for-1 stock split (effective January 9th), as well as an 83 percent dividend increase and a $3.5 billion stock buyback program.

This highlights one of the main drivers of the stock rally in the last few years: strong buybacks and dividend hikes. From 2010 to 2012, Mastercard paid roughly $288 million in dividends and repurchased $2.9 billion worth of shares. In 2013 alone, the company paid $182 million in dividends and repurchased $1.7 billion in common stock...about two percent of the market cap.

They will likely buy back about 2 million shares in 2014, again reducing shares outstanding by roughly 1.6 percent. Baird estimates that each 1 million share repurchase adds a little less than one percent to annual earnings per share (EPS) growth. Bottom line: the new buybacks will increase the chances for upward earnings revisions in 2014.

It's been a big year for buybacks. Expenditures are up 42.5 percent over the third quarter of 2012, according to Standard and Poor's. Two caveats:

1) Apple, which has been on a buyback tear all year, was a major reason for that move. If the iPhone maker was removed from the equation, Q3 is up a more modest 17.5 percent over Q3 2012.

2) Stock prices have risen, so companies need to pay more to get the same number of shares they got last year.

3) Because companies are also issuing new share, the key metric to watch is share count reduction. You want to buy back more than you issue, obviously. For Q3, that metric edged down 0.58 percent for the S&P 500. The good news, according to S&P, is that more companies are reducing shares than increasing them.

Here are the companies with the largest buybacks in Q3 (in billions):

Apple $4.9

Pfizer $3.8

Halliburton $3.3

Qualcomm $3.3

J&J $3.0

Source: S&P


Two initial public offerings (IPOs) priced above their range:

1) Autohome, a Chinese online auto site, priced 7.8 million shares at $17, above the raised price talk of $14-$16. I know--a Chinese online auto site. Huh? Still, there appears to be strong demand: initial price talk was $12-$14.

Why? They are the number one auto website in China in terms of daily visitors and time spent per user. The advertising money comes from roughly 100 auto makers (yes, there are 100 auto makers in China!). Dealers pay a subscription fee, which gives them stability in their revenues. Sales are $195 million this year; operating profit of $96 million, so they are profitable. Sales for the nine months ending in September grew 67 percent.

2) Valero Energy Partners, a Master Limited Partnership (MLP) that is an oil pipeline/terminal operator affiliated with refiner Valero (VLO), priced 15 million shares at $24, well above the price talk of $19-$21.

Pricing tonight:

1) Hilton Worldwide (HLT), offering 112.8 million shares at $18-$21. Hilton is the biggest hotel operator in the world, with 4,000 hotels and almost 700,000 hotel rooms.

2) AMC Entertainment, one of the world's largest movie screen chains (343 theaters with 4,937 screens), is offering 18.4 million shares at $18-$20. They are owned by the Wanda Group, a Chinese real estate company.

3) ARAMARK Holdings (ARMK), one of the leading providers of food and uniform services to healthcare, education, sports centers, and prisons, offering 36.3 million shares at $20-$23.

Pricing Thursday:

1) Cheniere Energy Partners, offering 30 million shares at $19-$21, a limited partnership (LP), will own a 55.9 percent interest in Cheniere, which owns liquid natural gas facilities.

2) Nimble Storage (NMBL), offering 8 million shares at $16-$18, an enterprise storage business, which incorporates high-performance flash storage. It's a technology change because flash is a quicker, more reliable than traditional disk-based storage. This is a hot space, and we could see a nice move up.

By CNBC's Bob Pisani