IB Net Payout Yields Model

MedcoHealth Solutions: Ultimate Net Payout Yield?

MedcoHealth Solutions (MHS) provides investors the rare opportunity of a growth stock with a strong enough balance sheet and earnings to have a massive Net Payout Yield. MHS recently announced another $3B stock buyback program and they only have a market cap of $19B. That's an easy 15% yield if they spend it this year. Considering they bought back $1B+ in each of the last 2 quarters the yield is very attractive. Companies with this much cash flow just don't trade at these multiples.

Unfortunately in this market most investors are looking for yields in bonds and dividend paying stocks. Considering MHS only offers the buyback portion of the Net Payout Yield, most investors are missing this high yielding stock. Considering the likely increase of dividend taxes in 2011 at least for high income individuals (the ones buying dividend yielding stocks in the first place), buybacks should be treated more advantageously but investors are too busy looking backwards. Buybacks are also tarnished by weak stock market results over the last 10 years. Even MHS has made the mistake of buying too soon. The stock trades in the $44s today and they bought at an average price of $58 in Q2.

Many an investor claims they'd rather have the dividends to invest how they saw fit, but in reality they'd all likely just plow the money back into stocks like MHS. Though with at least 15% less money due to taxes not to mention potential transaction costs. How is that better? After all, if you wouldn't reinvest the money immediately why do you still own MHS in the first place.

The main issue with MHS is that Obamacare has scared away investors. MHS is a pharmacy benefits provider that everybody assumes must be doomed from this bill. Assumptions abound that less money will flow to the bottom line for this sector. Competition from CVS Caremark (CVS) will be too strong. UnitedHealth (UNH) will drop them as a customer. Fears are relentless but the executives are buying stock like its going out of style. Nearly $500M in July alone.

Stone Fox thinks the concerns over the business plans of MHS are over done, but that doesn't make them a investment candidate for the Net Payout Yield portfolio alone. Their massive payback to investors is what solidifies our view. Analysts still consider the 5 year growth rate to be in excess of 16% due to the continual roll off of high cost drugs to generics over the next few years and the stock only trades at a forward PE of 11. Maybe the analysts are wrong, but management with the best insight to the future of this company couldn't agree more with those numbers.

Many investors discredit buybacks, but history has shown that these companies outperform over time. That's the key - overtime. MHS continues to reduce the float and at prices higher then the current quote. Rather then seeing management as incompetent for buying too high, see this as your chance to buy below when executives pulled the trigger over and over. Experts on this company have given you the ability to buy below them. Don't pass it up.

Share Repurchase Programs - Q2 Report
During the second quarter of 2010, Medco completed the remaining $331.6 million in authorized share repurchases under the prior $3 billion program. Also, under the new $3 billion share repurchase program approved in May 2010, Medco repurchased a total of 12.0 million shares for $696.5 million with an average per-share cost of $58.14. In total, Medco repurchased 17.6 million shares for $1.03 billion during the second quarter of 2010 with an average per-share cost of $58.45.

For July 2010 to date, Medco repurchased 8.7 million shares for a total cost of $489 million at an average per-share cost of $56.13.


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