On Monday, it authorised a $US2 billion repurchase of its common stock, employing a tactic frequently used by companies to boost shares during times devoid of other positive catalysts.
The share increase is welcome news for owners of Allergan’s stock, which had recently plummeted as much as 21% from a one-year high reached in July.
It’s an interestingly-timed development, considering the hit absorbed by Allergan’s drug pipeline on Friday, when the company received a “refusal to file” (RTF) letter from US Food and Drug Administration. It came with regard to Allergan’s application for Vraylar, a drug intended to treat the negative symptoms in adult schizophrenic patients.
And wouldn’t you know it, Allergan’s stock is up almost 4% on Monday, with the negative effect of the FDA news — released after the market close on Friday — more than offset by the buyback announcement.
In the press release announcing the buyback, Allergan didn’t exactly hide its rationale: The company thinks its shares are attractively-priced at current levels. They’re adopting a technique often used by companies to exhibit confidence in themselves, and so far it’s working.
“We continue to believe that Allergan stock is substantially undervalued, and the share price today presents a unique investment opportunity for the company,” Brett Saunders, chairman, CEO and president of Allergan, wrote in Monday’s release. “In its decision, the board is demonstrating its confidence in our future prospects.”
Still, Allergan’s success likely won’t be easily replicated by other US companies. Stock valuations are in the 89th percentile of their 40-year history, according to Goldman Sachs. That means many stocks in major indexes may be too expensive or fully-valued to be effectively boosted by repurchases.
Put differently, it might not make economical sense for a company to sink the required capital into a strategy that might not lift shares materially higher.
It’s a dynamic that Bank of America Merrill Lynch has recently highlighted. Long a reliable safety net for the 8 1/2-year bull market, buybacks are starting to dry up, a victim of their own success.
As such, it appears that Allergan’s success with its buyback authorization is purely situational. Given the right circumstances, the ever-reliable backbone of stock gains is still alive and well.