I’ve Got Your (Buy)Back: Flextronics and the Power of Capital Returns

On Wednesday Dow Chemical, the number 1 U.S. chemical maker by sales, increased its dividend and said it would buy back $5 billion worth of its own shares, bringing its total buyback authorization – or the amount of shares it is willing to repurchase – to nearly $10 billion. That represents over 15% of the company’s entire market capitalization – a truly astounding number. Now the reason buybacks are so valuable to investors is two-fold. First, companies like to repurchase shares when their stock is cheap, so a big buyback program often sends a message to investors that a company’s management believes its stock is undervalued. Second, buybacks can be used to boost earnings per share – a metric that remains extremely important to investors. By reducing the number of shares outstanding, each investor’s proportional stake increases. So now that we understand the power of buybacks, let’s take a look at a company that not only aggressively buys back its own shares, but has an impressive business model in its own right. That company is Flextronics - the second largest electronics manufacturing services company on earth. Basically, when businesses want to outsource their manufacturing, they turn to Flextronics for everything from design and procurement to engineering and distribution. This company touches almost every end market, from smartphones and wearables to autos and industrials. Now I like FLEX in part because its diverse customer base and consistent contracts throw off a ton of cash, and in part because it has a massive buyback authorization for 20% of its share-count. That is one of the largest buyback programs out there, and a true testament to the future value of this company. When it comes to buybacks, Flextronics is the king. Consider buying it - you won't be alone.