Are Stock Buybacks Always Beneficial?

Stock repurchase programs are a common way for companies to invest in themselves and boost value for shareholders. On the morning of August 26, Varian Medical Systems VAR announced that it would extend its revolving credit facility with Bank of America BAC in order to repurchase $250 million of its own shares.

In order to understand the impact of Variant's plan, Benzinga reached out to Ticonderoga Securities' senior medical technologies analyst, Junaid Husain. According to Husain, "the most obvious consequence from the buyback is that earnings ratios will increase. In the event Varian is able repurchase its shares within the next quarter, the bottom line could see an increase of up to $0.10-$0.15." This particular effect may very well appease investors and influence stock price.

Stock buybacks, however, are not the only thing investors want to see. Husain stated that "it will only take the company so far, investors want to see Varian using its cash for other strategic transactions. In fact, Varian is working on various opportunities, attempting to increase its sales and earnings growth."

Stock buybacks may also be a way for companies involved in medical technologies like Varian to hedge against future health care legislation. As hospitals and health care service companies are experiencing waning growth, Varian and comparable companies are directly affected. In order to compensate for future adversity, Varian has been trying to create "new devices and software products. The company has also been vocal about possible mergers and acquisitions."

Interestingly, Varian tapped into its credit facility to finance the share repurchase program. The primary reason for not using its cash instead is "because of taxes," said Husain. Using cash would force Varian to pay more than it would if it bought on credit. Moreover, Varian has a large global presence, and has "approximately $600 million in cash overseas. Repatriation tax codes have improved in the 2000s and Varian may use money saved on repatriation taxes to fuel M&A activity."

Since late July, Varian Medical Systems declined over 20%. The company's plan to repurchase shares as quickly as possible will improve its stock price in the short-term, and may even help it out in the long-term. The health care industry has to accommodate future legislation, so it will be a challenge for Varian to continue to add value.

Varian is trading at around $55.50, up over 4% in today's trading session.