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Morningstar | Johnson Controls Announces $8.5 Billion Share Repurchase Authorization

In preparation for the upcoming sale of its power solutions business, narrow-moat-rated Johnson Controls announced that its board of directors has approved an $8.5 billion share repurchase program, which is in addition to the $1.6 billion the firm has available under a previous program. In a March 7 press release, Johnson Controls stated that the power solutions sale received antitrust approvals in both the United States and Europe, and the deal is still expected to close "no later than" June 30. As we had previously noted, the power solutions sale should net the firm approximately $8 billion of cash after the firm uses $3 to $3.5 billion to reduce its debt load. We thought that management's comments during the firm's fiscal first-quarter earnings call made it clear that the remaining cash proceeds after paying down debt would be used to repurchase shares.

Still, in the weeks following Johnson Controls' Feb. 1 first-quarter earnings release, management was asked about its appetite for mergers and acquisitions and the potential for industry consolidation at two investor conferences. Bloomberg also published a Feb. 22 article hypothesizing that only Johnson Controls has the scale to merge with United Technologies' Carrier business via a reverse Morris trust transaction. In our view, Johnson Controls has the tools to succeed on its own, and given that the stock is currently trading at over a 20% discount to our fair value estimate, we think share repurchases are the most prudent use of the approximately $8 billion of cash the firm will have after paying down debt. We think this share repurchase authorization supports our view.

We're maintaining our $46 per share fair value estimate, and we have not made any changes to our earnings forecast because we had already assumed Johnson Controls would spend over $8 billion to repurchase its stock after the power solutions sale.