Share Buyback
| 709,000,000 | Shares Outstanding |
| $ 2,390,000,000 | Current Anticipated Earnings |
| $ 3.37 | Current Anticipated EPS |
| $ 36 | Current Stock Price |
| 684,000,000 | Shares Outstanding After Buyback |
| $ 2,390,000,000 | Anticipated Earnings |
| $ 3.49 | EPS after Buyback |
| 13.5 | PE |
| $ 47 | Anticipated Stock Price after Buyback |
Currently at 36 the market is anticipating earnings of about $2.3B for the year, and by reducing the number of outstanding shares to 684 million by buying back $900B at the current price, at the current PE, should result in a stock price of about 47 per share.
Increased Dividend
| Current Dividend Yield | 2.8% | |
| Dividend | $1.00 | per share |
| Stock Price | $35.71 | Current Stock Price |
| Current Yield | 2.8% | |
| New Dividend | $1.25 | per share |
| New Stock Price | $44.64 | After Dividend Increase |
At the current stock price of about 36, and a current dividend of about $1 per share, the yield on this conservative stock is about 2.8%. The question is: how much, if any, to increase the dividend? An increase of 25 cents/share would be sustainable with the business currently like it is for 4 years (at the current number of shares outstanding) and at the same yield, should result in an increase in the stock price to about $45 per share. Note: At the current price and yield, the market is assuming that MRO will have zero growth going forward, with the economy in its current state. Any growth prospects in this business could be factored in for some additional pricing improvements.
Acquisition
| Shares Outstanding | 709,670,000 |
| Investment | $ 900,000,000 |
| Investment ROI | 0.1 |
| Increased Earnings/Yr | $ 90,000,000 |
| Increased Earnings/Share | $ 0.13 |
| PE | 13.2 |
| Increased Mkt Cap | 1.67 |
| Current Stock Price | $ 36.00 |
| New Stock Price | $ 37.67 |
Using the optimistic assumption that MRO could buy some business that has a 10% ROI in the first year, which is a wildly optimistic assumption, the value in increased earnings for the company will be $90M per year, which at 709 million shares comes out to a mere 13 cents per share. At the current PE, 13.2 times earnings, the increased stock price from this type of investment would only be $1.67 per share.
Note: Using the $900M to pay down their long term debt would theoretically have exactly the same impact on the stock if, and it is also a big if, the reduced interest expense by retiring the debt made its way similarly to the bottom line....
Note: Using the $900M to do some sort of debottlenecking project in their current operations will be evaluated on exactly this basis as well: If it is a more attractive investment, relative to the stock price, than just buying back their own shares, they will do so rather than make the investment internally.
The second question comes up: What ROI would an investment need to make in order for the impact on the stock price to be the same as buying back shares, and the answer is, something on the order of 50 percent ROI, which tells me, at least that the likelihood of this alternative happening ought to be next to zero, unless they are really confident..... for that matter, if they can find an investment that will return 50 percent, I hope sincerely that they tell us what it is, so we can invest in it ourselves.
The Bottom Line
Either the stock buyback or the increased dividend could happen, more likely the stock buyback, because the conservative management will correctly not want to get the widows and orphans accustomed to the extra 25 cents per share....
In either case, it makes sense for this stock to be trading up around 47, from its current 36.
Note: The world is chaotic, and there are no guarantees on anything.....
Side issue: What kind of an economy are we in where the management will be greatly advantaged to shrink the company rather than position itself for growth in some way....
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