A huge buyback of this value stock has surprised investors. Is it worth buying?

The world's largest diamond jewelry retailerSignet Jewelers (NYSE: SIG)Shares surged on Wednesday after the company pleased investors with a stock buyback and raised its performance guidelines to accommodate a reduction in the number of shares.

Following the share purchase, the company raised its adjusted EPS guidance from $9.08 to $10.48 to $9.90 to $11.52, which will provide an additional boost to earnings in fiscal year 2026 as the company benefits from a full year of reduced share volume.

What's going on here?

Signet has reached an agreement with private equity firm Leonard Green & Partners (LGP) to purchase half of LGP's 8.2 million shares in the retailer. As a result, Signet will have purchased 4.1 million shares at a price of US$414 million, based on the stock price as of April 1, 2010, and LGP's stake in the retailer will have increased to 8.2 million shares. Upon completion of the transaction, LGP's stake will have a stated value of US$328 million and will earn a dividend of 5%.

The transaction will reduce Signet's post-dilution share count by 7.6% and Signet will utilize $1.4 billion of cash on its balance sheet.Signet's net income will also be reduced by $83 million to reflect the difference between the sale price of the preferred shares and the price paid.

In addition, Signet has agreed to pay $328 million to曏 LGP to cover the book value of its remaining preferred stock balance, which will eliminate its 2.8 million preferred shares and reduce its outstanding shares by approximately 7 million, or 131 TP3T, resulting in an increase in earnings per share of $151 TP3T. In addition, the company will save approximately $34 million per year in preferred stock dividends. In addition, the Company will save approximately $34 million per year in preferred stock dividends.

Signet is on a roll

For Signet, the transaction is both a return to shareholders and a reduction in the number of shares in the company, and reflects the results of the company's "Road to Terry" strategy, which has seen the company realize double-digit revenue growth and a gross margin improvement of more than 400 basis points while closing stores with poor performance. During this period, the Company's adjusted earnings per share also increased by nearly 60%.

In an interview with The Motley Fool, Simmons CFO Joan Hilson also pointed out that the merger will reduce the company's leverage by 10%, putting the company in a better position to make acquisitions and invest in the business.

In the same interview, Gina Drosos, SimCEO, emphasized the reasons for the change, "Our company has transformed. We have created a business model that generates cash on a sustainable basis." She also noted that the company generates nearly 15% of cash annually, making Signet attractive to value equity investors.

Is Signet worth buying?

Signet has been a quiet merit stock in recent years; shortly after launching its "Path to Brilliance" strategy, the jewelry stock more than tripled in the past five years.

The stock fell in its most recent earnings report as investors were not convinced by the company's guidance, but Signet rewarded investors by increasing its dividend by 26%. Wednesday's share buyback announcement is the latest effort to return capital to the company's曏 shareholders, and the company is in a good position to do so with rock-solid fundamentals and a price-to-earnings ratio of about 10.

Signet is also poised for growth over the next few years as it benefits from the resurgence of the engagement business. The bridal business accounts for approximately 40% of the company's revenues, so it expects a significant "tailwind" over the next three years, and it has other growth drivers, including high-margin services such as vivariums, which could boost margins.

With a 15% decrease in shares outstanding and a recent dividend increase of 26%, Signet looks more shareholder-reporting than ever, and the stock remains a great value in terms of its projected growth going forward. Shares of this leading jewelry company are still worth buying.

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Jeremy Bowman does not hold any of the shares listed above. the Motley Fool does not hold any of the shares listed above. the Motley Fool has a disclosure policy.

A huge buyback of this value stock has surprised investors. Is it worth buying? This article was originally published by The Motley Fool.