Merck Ramps Up Buyback Frequency Adding $10 Billion Following Earnings Estimate Beat
Today, Merck & Co. Inc. (MRK) unveiled a new $10 billion buyback program, including a $5 billion accelerated repurchase component, in combination with earnings that topped analyst estimates by $0.07. Since the new announcement deviates from Merck’s historical buyback patterns, we believe that it may signal an opportunity for investors in the current volatile environment.
“Increasing the dividend and authorizing additional opportunistic share repurchases are driven by our commitment to a balanced capital allocation strategy and supported by our strong balance sheet and cash flow generation that provide us the flexibility to return cash to shareholders while also investing in our pipeline, innovation and growth,” said Kenneth Frazier, chairman and CEO of Merck. “Even with these actions, we will continue to maintain ample capacity for business development, which remains a priority.”
These remarks and the historical performance of Merck indicates that Merck has as track record of doing buybacks for the right reasons.
That said, Merck has a track record of announcing a buyback program about every two years (2009, 2011, 2013, 2015 and 2017). This increased $10 billion authorization less than one year after the November 2017 program combined with a $5 billion accelerated component and an earnings beat is compelling.
Figure 1: Merck has generally authorized a new buyback program every two years.
|Announcement Date||Buyback Amount|
Historically, within 30 days of announcing, MRK has outperformed the S&P 500 TR Index and S&P 500 Health Care Sector 80% of the time (0.90% and 0.96% average outperformance respectively) since 2009.
Figure 2: MRK has historically outperformed following buyback announcements.
The April 2011 announcement occurred during a period of heightened market volatility and uncertainty. In the 90 days following the announcement, MRK was down slightly at -0.56% versus the S&P 500 TR Index down -3.62% and the S&P 500 Health Care Sector down -2.65% (outperforming by +306 bps and +210 bps respectively). One year later, MRK was up +14.84% versus the S&P 500 TR Index up +5.00% and the S&P Health Care Sector up +6.49% (outperforming by +984 bps and 834 bps, respectively).
Despite the volatility this year, , MRK has performed well
relative to the S&P 500 TR Index and the S&P 500 Health Care Sector. If the volatility in 2018 continues in a similar fashion to 2011, we conclude that Merck could be a potentially good option for investors.
Figure 3: MRK has performed well this year despite the market volatility.