Why U.S. Steel’s stock buyback is such a big winner

Stock buybacks have been criticized by those who opposed the 2018 tax cuts passed by Congress. The opposition says that the purpose of lowering corporate tax rates from 35% to 21% was to increase business investment, not buy back stocks. They are also opposed to the use of COVD funds for this purpose.

Analysts have been criticizing large-scale corporate stock buybacks because they feel companies should be reinvesting in innovation for their company. So, why is U. S. Steel’s (NYSE: X) multimillion-dollar stock buyback program getting such high marks?

Simply because it adds value while underscoring its long-term blueprint for success. “Our future now includes a $300 million stock repurchase program and $0.05 per share quarterly dividend to begin directly rewarding stockholders for the progress we have made so far,” U.S. Steel chief executive David Burritt said in a statement that was well-received by investors and analysts alike.

“We continue to view Street estimates for 2022 as way too low. We expect capital return to remain a consistent feature of the story going forward given our cash flow outlook up to  $5.0 billion in total for 2022 and 2023, even with elevated capex spending,” Credit Suisse analyst Curt Woodworth told investing.com.

He gave the U. S. Steel stock an “outperform rating” and he believes the stock has a credible path to even higher mid-cycle earnings, planting a $49 price target on it. The stock is trading around $25 today, highlighting the significant value creation potential of U.S. Steel’s strategy and the reason a buyback can be so attractive.

Here are just a few reasons critics and analysts have been hailing the move:

The Pandemic Profit by U. S. Steel, and the rest of the industry, took advantage of higher steel prices because of supply chain issues and rising demand.

“Our balance sheet has been transformed and the cash flow generation of the business has us highly confident in our ability to pre-fund organic growth investments that will expand our existing competitive advantages,” CEO Burritt told investors.

Typically when companies like U. S. Steel are in a cash position that makes for a favorable buyback climate, the choice is always a matter of whether they increase share market value with a buyback or reinvest in the company. U. S. Steel decided it wanted both.

“It’s not either investing in our business or returning capital directly to stockholders, it’s both,” Burritt added. “Our future now includes a $300 million stock repurchase program and $0.05/share quarterly dividend to begin directly rewarding stockholders for the progress we have made so far,” he added. “We are confident in the long-term value our new, highly capable mini-mill will create as it further expands our competitive advantage to produce sustainable and differentiated steel.”

Finally, on the heels of the buyback announcement, U. S. Steel released its fourth-quarter guidance, and while many American manufacturers are giddy over the surprising gains of the year, U. S. Steel is already positioned for a strong first quarter with few obstacles in 2022.

“Our business continues to operate at record safety, quality, and reliability levels,” Burritt said in the company’s official fourth-quarter guidance news release. “We are ending 2021 from a position of strength and expect continued strong performance in 2022 and beyond. This year, we’ve transformed the balance sheet, enhanced direct returns to stockholders, and are on a path to get to our ‘Best for All’ future faster. Next year, our fixed-price contracts are resetting significantly higher, providing better earnings stability compared with competitors with more spot exposure. Additionally, incremental demand drivers are materializing, and we believe the steel industry super cycle will continue. Our fourth quarter guidance indicates another quarter of strong performance yet reflects a temporary slowdown in order entry activity, which we believe is related to typical seasonal year-end buying activity.”

Burritt added that U. S. Steel feels well-positioned to continue its growth in the coming year. “We are bullish for next year and remain agile to ensure we continue to meet our customers’ needs as we enter the new year. 2022 should be another great year for U. S. Steel with robust free cash flow, continued ample liquidity to fund strategic investments, and additional opportunities to enhance our capital allocation priorities. U. S. Steel’s future is bright, and I can confidently say our best days are ahead.”

Whether you’re a value-focused investor or one that finds the momentum in steel attractive, U. S. Steel continues to differentiate itself from its peers. U. S. Steel’s stock is currently trading at about 2x 2022 consensus EBITDA, a significant discount to peers. If it were to trade at a multiple similar to its peer group of 6 to 7 times EBITDA, it isn’t unrealistic to reach $40 or more.

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Michael Busler