On the face of it, the $3 billion that Accenture ( ACN) has piled onto its existing stock-buyback program is the company's latest attempt to prevent a crush of shares from flooding the market and depressing the stock price. When announcing the addition on Thursday, the company said that most of the cash will absorb tens of millions of so-called Founder shares granted to the partners of the firm at the time of the initial public offering in 2001. Restrictions on the sale of those shares expire in 2009, threatening to fill the market with more shares than buyers if current and former partners unload large amounts of their holdings within a short period of time. That could force traders to lower their bid-ask spread, and pull down the share price. But the size of the buyback -- which is nearly double the $1.65 billion remaining under the existing authorized buyback plan -- may be the true significance of Thursday's announcement. Accenture is telling shareholders that it has confidence in its ability to continue generating cash regardless of market conditions. The company has not specified a timeline for the repurchases, but said that they will take place within the next few years. "The magnitude of this move coupled with the existing authorization genuinely makes the statement that management feels very positive about the company's prospects," says Eric Boyce, a portfolio manager with Hester Capital Management, which holds Accenture shares. "It's a viable use of cash flow in the absence of acquisitions or other business development opportunities."
For Accenture, signals about future prospects are especially noteworthy in a slowing economy. During the company's last conference call with analysts, Chief Executive Bill Green faced questions about the company's vulnerability to an economic downturn. Accenture derives about 60% of its revenue from consulting projects, which some investors and analysts have worried could be cut by clients looking to rein in spending in tough times. "I think they're struggling to convince everybody that their business is not ultra-cyclical," said Hester's Boyce. "This
increase to the buyback plan helps to get that message across." The size of its buyback plans may also signal that management believes its stock is trading below its intrinsic value, says Boyce. Accenture's stock actually looks expensive relative to its peers. According to Standard and Poor's analyst Dylan Cathers, Accenture's stock price is worth 16 to 17 times his estimate of its calendar-year 2008 earnings, compared to a range of 12 to 13 times for its large U.S. rivals, EDS ( EDS), ACS ( ACS) and Computer Sciences ( CSC). Cathers says this premium is justified because of Accenture's high cash reserves, low long-term debt, above-market growth rate and large amount of high-margin consulting work. The company funds share repurchases from its free cash flow, or cash remaining after acquisitions and other investments in growth. This keeps its balance sheet nearly free of debt, and avoids excessive stockpiles of cash that could otherwise be distributed to shareholders.
Accenture generates about $2 billion a year in free cash flow, which has helped it amass about $3.3 billion in cash on its balance sheet with just $3 million in long-term debt. This has given the company flexibility to repurchase shares periodically. In the future, more of that cash could go to shareholders. Although the company has increased its dividend by 40% since introducing it in 2005, its yield is just over 1%, which is less than the 1.85% yield of a theoretical investment that mirrors the S&P 500 index. Also, Accenture's buybacks have focused on absorbing Founder shares, rather than returning cash to general shareholders. Of the approximately 305 million shares that have been repurchased since the company went public, only about 66 million were open-market buybacks from all investors. The company's board has authorized it to use a portion of the $3 billion for open-market buybacks, at management's discretion. Approximately $900 million of the $1.65 billion remaining from Accenture's existing buyback plan is designated for open-market buybacks. The announcement of the buyback sent Accenture's stock, which opened at $39.01 on Friday, up 1.3% above the previous day's closing price. Shares continued their gains throughout the day and closed up 69 cents, or 1.8%, to $39.20, about 11% off its 52-week high.