Merck’s Recent Share Buyback Could Signal an Opportunity in a Volatile Market Environment

Michael Schoonover, COO & Portfolio Manager
Michael Schoonover is Chief Operating Officer of Catalyst Capital Advisors LLC and Rational Advisors, Inc. and Portfolio Manager of a share buyback strategy fund at Catalyst Funds. He began his association with Catalyst in 2011 as a research consultant supporting the implementation and back testing of quantitative strategies. In March 2013, he became a senior analyst at Catalyst to provide investment research for several mutual funds. From 2005-2011, he served in various technical and scientific management roles with the Perrigo Company. Mr. Schoonover has an MBA with high distinction from the University of Michigan Ross School of Business and a BS from the University of Michigan.

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
11/24/2009 $3 billion
04/27/2011 $5 billion
05/01/2013 $15 billion
03/24/2015 $10 billion
11/28/2017 $10 billion
10/25/2018 $10 billion

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.