HollyFrontier Corp. (HFC, Financial) jumped 1.95% to $72.03 on Thursday after the board of directors of the refiner authorized the repurchase of a portion of its own common stock for $1 billion.
Based on previous authorizations, the company has already repurchased about 1.2 million shares of its own stock from the beginning of the third quarter until Sept. 13. There was still $43.6 million remaining under the prior share repurchase program, but that will be replaced by the new authorization.
So far this year the refiner has spent roughly $142 million on share repurchases and approximately $4.7 billion since 2011. The strong commitment of the company to return a considerable portion of its free cash flow to its own shareholders every year is also demonstrated by the fact that the new program represents about 8.1% of its current market capitalization of $12.6 billion.
This strong commitment is laying the foundation of a fruitful future for shareholders of HollyFrontier Corp.
Assuming an average share price of $58, which is the mean of the 52-week range of $32.11 to $83.28 per share, the company may withdraw up to 17 million of its own ordinary shares from the stock market. What does that mean? It means that until the completion of the program, we may witness an increase in the adjusted earnings per share up to 12%.
The accomplishment of that growth target also depends on how long it will take to complete the $1 billion repurchase program. The earlier the program is completed, the earlier the shareholders of HollyFrontier may experience such a boost in earnings per share.
Of course, the expected increase in the net earnings per share will have a positive impact on the dividend per share that HollyFrontier is paying to its shareholders. As of Sept. 14, the refiner is distributing about 17% of its net earnings to its shareholders in the form of dividends. If compared to an industry median of 41%, the payout ratio of HollyFrontier is much lower. But shareholders can invest some hope in further quarterly cash dividend hikes over the coming quarters thanks to the effect that the buyback program will progressively have on the volume of shares outstanding.
HollyFrontier is currently paying a cash quarterly dividend of 33 cents that, if held constant over the following four quarters, will lead to a forward annual dividend of $1.32 for a yield of 1.83%. The yield is interesting if compared to the current dividend yield of 1.76% of the S&P 500 index. Compared to the yield of 2.9% that the U.S. government is granting to the holders of 10-year U.S. Treasure bonds, HollyFrontier's is much lower.
Even assuming a constant payout ratio of 17% and 12% growth in earnings per share in 2023 from the prediction of $5.52 for full fiscal 2018, the forward dividend yield will still be far below the yield of 2.78% on the five-year U.S. Treasury bond. Unless net earnings of HollyFrontier grow 44% annually on average over the next five years starting in 2018, the odds that today we are investing in a stock that will also beat the five-year U.S. Treasury bonds are very high. The annual growth rate of 44% is a weighted average of analysts' estimates.
Shareholders will also receive a return through appreciation in the market value of the stock so long as the commodity rises. For the 52 weeks through Sept. 13, shareholders of HollyFrontier Corp. have already seen the share price increase by 122%. The stock is not very expensive based on what the chart of GuruFocus depicts. The share price is on par with the 100- and 50-day simple moving average lines, though it is far above the 200-SMA lines. The current share price is still an ample 15% below the 52-week high of $83.28 and 125% from the 52-week low of $31.95.
The 14-day Relative Strength Index is 50.64 in a range of 20 to 80. Some indicators on HollyFrontier Corp. are suggesting that an investment in the ordinary stock might still be profitable at current valuations. The price-earnings ratio is 9.13 versus an industry median of 11.49, the price-book ratio is 2.17 versus an industry median of 1.75 and the price-sales ratio is 0.78 versus an industry median of 0.42. The EV-to-Ebitda ratio is 6.6 versus an industry median of 8.25.
For full fiscal years 2018 and 2019, consensus is for adjusted earnings per share of $5.52 and $6.98. The forward price-earnings ratio is 9.66. When the ratio is multiplied by an adjusted earnings per share of $6.25, it yields a $60.40 per share value. That is nearly 16% below the share price at close on Thursday.
However, according to analysts, there is still a 4% margin down the road for stock appreciation within the next 52 weeks. In addition, the recommendation rating is 2.8, which means that the consensus is to hold.
Disclosure I have no positions in any security mentioned in this article.
