Herbalife to Repurchase Shares - Analyst Blog

The board of Herbalife Ltd. HLF recently announced that the company would repurchase $266 million worth of shares from Bank of America Merrill Lynch, a unit of Bank of America Corp. BAC. The move is in accordance with the company's decision to terminate the company's quarterly cash dividend henceforth and instead utilize its cash to repurchase shares. The decision was taken at the recently held first quarter conference call.

Under the share repurchase terms, the total number of shares repurchased will depend upon the volume-weighted average share price over the course of the program. Herbalife will thereby pay $266 million and will receive a portion of the shares based on an Interim Share Delivery schedule, and the remainder upon completion of the program. The share repurchase program is expected to be complete by the end of the second quarter of 2014.

This weight management and nutritional products company believes in returning cash to its shareholders and has repurchased approximately $2.85 billion worth of shares since 2007. Share repurchases signal the underlying strength of the business and free cash flow generation ability of the company.

In the first quarter of 2014, the company paid $30.4 million in dividends and repurchased $685.8 million of shares under the previous share repurchase program. For second quarter 2014, the company expects to repurchase shares worth $581 million as part of its previously announced $1.5 billion share repurchase program.

Last month, Herbalife reported better-than-expected first quarter 2014 results and raised its guidance for 2014 despite being weighed down by investigations. Adjusted earnings of $1.50 per share exceeded the Zacks Consensus Estimate by 16.3% and increased 18% year over year on the back of double-digit growth in the top line. Net sales of $1.263 billion beat the Zacks Consensus Estimate and grew 12.4% from the prior-year period fueled by volume growth of 9%.

Solid first quarter 2014 results, increased share buyback and growth in China led the company to raise its earnings guidance for full year 2014.

Despite consistently impressive earnings performance, Herbalife's business practices have been criticized since Dec 2012, when activist investor William Bill Ackman, hedge fund manager of Pershing Square, first accused the company of making money by recruiting new sales personnel and not from its sales.

Herbalife's operations are also being probed by the Federal Bureau of Investigation, the Department of Justice, the U.S. Securities and Exchange Commission, Federal Trade Commission, and two attorney generals. Additionally, as per a report by New York Post in Jan 2014, the Canadian Competition Bureau is also looking into the operations of the company.

Herbalife, on its part, has been denying the charges since 2012 and has welcomed the inquiry. It stated that it will co-operate with the investigation as it is confident that its operations comply with all applicable laws and regulations. Carl Icahn, the company's biggest shareholder with a 16.8% stake, also supports Herbalife in its fight against Ackman.

Herbalife is not the only company, which employs sales representatives to sell its products. Other multi-level marketing companies like Nu Skin Enterprises Inc. NUS and USANA Health Sciences Inc. USNA also follow the same distribution model.

Herbalife holds a Zacks Rank #3 (Hold).