Is the Wendy’s Buyback a Sign of Strength?

Wendy’s has seen its revenue fall steadily over the past few years, from around $2.5 billion in 2012 to about $2 billion in 2014, as it has reduced the number of company-owned restaurants. Nevertheless, it managed to double its adjusted earnings per share (EPS) over the same period, and it certainly has performed better than competitor McDonald’s Corp. (NYSE: MCD).

The company just announced it will be buying back some $1.4 billion worth of stock by the end of 2016, which is roughly a third of its market cap. This includes $211 million worth of stock currently owned by activist investor Trian, which is looking to cut its stake from around 25% to between 20% and 17%.

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The buyback comes at an odd time, with the stock hovering near its 52-week high after a 24% rally so far this year. Generally, buybacks are used to do one of two things. In the first scenario, they are used to reward shareholders after a period of strong performance and a swelling balance sheet, such as in the case of Apple Inc. (NASDAQ: AAPL). In the second, they are meant to prop up EPS by reducing the number of shares outstanding, which is generally a tactic used when things are not going particularly well.

The outlook for fiscal 2015 earnings has now updated to a range of $0.31 to $0.33 per share, which is not only below the analysts’ consensus, but also below 2014’s $0.34 per share figure, reflecting the sale of its bakery business. Even including the $0.02 contribution from the bakery unit, this figure would have been more or less flat year-over-year.

As such, seeing that earnings growth is slowing down, the company appears to be using the buyback to reboot EPS growth. Indeed, largely as a result of the new buyback program, Wendy’s sees EPS growth accelerating to around 20% starting in fiscal 2018. For fiscal 2016, EPS growth is expected in the high single digits.

This all is great news for shareholders, of course, and the stock is up more than 5% early Wednesday. However, it is not necessarily a good sign for Wendy’s that it needs to so drastically reduce the number of shares outstanding in order to increase EPS.

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