Is Delphi Automotive PLC's $1.5 Billion Buyback a Bright Idea?

By Markets Fool.com

With the stock market at near-record highs, but the Federal Reserveset to hike interest rates, many investors are growing nervous about stocks. Many, but not all.

Continue Reading Below

Corporations continue to plow billions (and more billions) of dollars into buying back their own stock. Just last week, auto-parts makerDelphi Automotive announced a $1.5 billion repurchase plan. Is this a savvy financial move to scoop up cheap shares, or a misguided attempt by management to goose the performance of a lagging stock?

Today, we'll find out, as we ask two basic questions:

Can it pay?
As a matter of fact, yes it can. Maybe not all at once, mind you -- Delphi only has about $1 billion in cash on its books, and another $243 million in long-term investments, according to S&P Capital IQ. But the company is also generating $1.1 billion in positive free cash flow annually. Combined with its cash reserves, that should easily cover the cost of this buyback.

it pay?
That, I'm less sure of. Granted, Delphi has cash aplenty. But it also has about $2.4 billion in debt, or more than twice its current reserve of cash and investments. What's more, if the company were to take a step back and expand its field of view, management just might find other stocks in its sector that are even more attractive than Delphi's!

Company

P/E

Dividend Yield

5-Year Projected Growth Rate

Total Return Ratio

Delphi Automotive

15.6

1.5%

14.6%

0.97

Dana Holding

13.8

1%

13.6%

0.94

Lear

16.1

0.8%

21.4%

0.72

Magna International

11.2

1.6%

16.3%

0.62

Continue Reading Below

All peer comparisons arecourtesy of finviz.com.

Make no mistake. When judged by the "total return" yardstick first popularized by superinvestor John Neff, Delphi Automotive definitely looks like a bargain. It has a modest price-to-earnings ratio, a strong growth rate, and the second-biggest dividend payout in its class. All this adds up to a 0.97 total return ratio, or TRR, on the stock, bringing Delphi Automotive stock in just under the wire, below Neff's "1.0" TRR cutoff.

Yet a quick look at the table above shows that Delphi is far from the only bargain in the auto parts space. Dana Holding and Magna International both cost less on a P/E basis, and Magna sports a better dividend yield and faster growth rate to boot. Why, even Dana Holding, despite its slower growth and lower dividend yield, boasts a P/E ratio low enough to make it a (slightly) better bargain than Delphi.

Also, all three of Delphi's peers sport more attractive levels of debt than does Delphi.

What it means to investors
Now, don't take this as a knock against Delphi, per se. The company's attractive valuation and strong free cash flow make repurchasing shares look like a sound business decision -- one Delphi can easily afford. All I'm saying is that there are even better bargains out there.

If you're an investor in auto-parts stocks -- rather than a director of Delphi Automotive -- those are the ones you should be looking at.

The article Is Delphi Automotive PLC's $1.5 Billion Buyback a Bright Idea? originally appeared on Fool.com.

Fool contributorRich Smithdoes not own, nor is he short, any company named above.You can find him on CAPS, publicly pontificating under the handleTMFDitty, where he's currently ranked No. 269 out of more than 75,000 rated members.The Motley Fool recommends and owns shares of Apple. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.