Share buybacks an effective way of putting cash to work

Like many other companies, Qualcomm finds itself in a situation where it is sitting on billions of dollars in cash and the stock price has fallen sharply from its highest levels nearly a year ago.

What is a company to do? For Qualcomm, a logical option was to do a massive stock repurchase program. In May the company announced what is referred to as accelerated share repurchase agreements with two financial institutions to repurchase a total of $5 billion in Qualcomm’s common stock.

"These repurchases represent a significant step toward meeting our goal of repurchasing $10 billion of common stock by March 2016, in addition to our commitment to return a minimum of 75 percent of free cash flow to stockholders through dividends and repurchases," said CEO Steve Mollenkopf.

For the second quarter of 2015, Qualcomm ranked only behind Apple and Express Scripts in the size of share buybacks. Apple spent $10 billion to purchase shares, Express Scripts $5.5 billion, and Qualcomm $5.4 billion. For the San Diego company, that represented a significant increase from the first quarter repurchase of $1.9 billion.

The concept behind these purchases is to increase earnings per share. Since there will be fewer shares of stock outstanding it will raise the EPS.

"Companies continue to use buybacks to add to the EPS at a time when EPS growth has become the center of attention for investors," said Howard Silverblatt, senior analyst at S&P Dow Jones Indices.

For the second quarter, total share purchases reached $131.6 billion, down from $144.9 billion in the first three months of the year. However, compared to the same quarter a year ago, buybacks increased by 13.2 percent.

For Qualcomm, the repurchase activity came at a time where the share price was significantly lower than it was a year ago. Although the exact amount of the buyback purchases is not public, it likely is well below the peak price of $78.53 in October 2014. Qualcomm shares closed Tuesday at $56.32.

The current quarter, the last three months of the year, has historically been the busiest time of the year for buybacks and an omen of positive results for investors.

"Buybacks represent the single largest source of demand for U.S. equities. The typical year-end surge in buyback activity could help boost the market above our year-end target," said David Kostin, chief U.S. equity strategist at the Goldman Sachs Group.

The current target for the S&P 500 stock index is 2,000, not very far away from the close Tuesday at 1,979.92.

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