by Will Ashworth | March 7, 2012 11:17 am
Warren Buffett caused a stir last September when he announced that Berkshire Hathaway (NYSE:BRK.A) would consider share repurchases if the price were right. Buffett has never repurchased shares before, so this was a big deal to investors. Berkshire stock popped 8% on the news, closing on Sept. 26 at $108,449 and hasn’t looked back since.
In his annual letter to shareholders, Buffett explained that Berkshire Hathaway would pay no more than 110% of book value per share, which as of the end of December was $109,846 for each Class A share. Buffett paid an average price of $105,902 per share.
With the stock trading at $117,855 as of March 6, it looks as though the buybacks are on hold for now. Investors can safely assume that Buffett considers Berkshire stock cheap at just north of $100,000.
However, what’s good for Berkshire Hathaway isn’t necessarily good for the five companies that have announced buyback plans in recent days. Just because management’s buying doesn’t mean you should, too.
Jarden (NYSE:JAH) completed a modified Dutch auction tender offer March 5, buying up 12.3 million of its shares for $36 apiece, an outlay of $442.6 million. On the worst trading day so far in 2012, Jarden’s stock jumped 3.61%, closing at $37.05 a share.
Investors are making a mistake in jumping on the bandwagon. Buffett would have paid no more than $24 a share. Jarden management, which has run up a debt load of $3.2 billion over the past seven years, had no business paying such a high price for shares originally used to make overpriced acquisitions. Stay away from Jarden until it makes a serious effort to reduce its debt.
Priceline.com (NASDAQ:PCLN) announced March 6 that it will offer up to $875 million in six-year convertible senior notes. Some $200 million of that will be used to buy back its stock in private off-market transactions. Priceline’s earnings are flying, its stock is up 35% year-to-date and it closed Tuesday at $629.74 — 3% off its five-year high.
Don’t get me wrong; I think Priceline.com is a free-cash-flow machine. However, with the stock trading at 12 times book value, I have to wonder about two things: First, why does the company even need to issue notes to buy back its shares? And second, why does it feel the need to buy now when its shares have never been higher? PCLN may be able to throw around cash, but that doesn’t mean you should.
An unseasonably warm winter saw Dick’s Sporting Goods (NYSE:DKS) announce lower-than-expected fourth-quarter earnings March 6. Management expects same-store sales to grow 2% to 3% in 2012, with earnings per share somewhere between $2.38 and $2.41, up from $2.10 in fiscal 2012.
Management is so confident that the stock will keep climbing that it has announced a $200 million share-repurchase program. DKS, like Priceline.com, is within pennies of an all-time high.
Once again, I like the company, but when you can buy Cabela’s (NYSE:CAB) for two times book value, versus to five times book for Dick’s, this is another company that doesn’t rate a buy right now.
Qualcomm (NASDAQ:QCOM) is yet another example of a company bumping up against its five- and 10-year highs. Against this backdrop, Qualcomm announced March 6 that it is implementing an open-ended $4-billion share-buyback program, along with a 16% increase of its quarterly dividend, to $0.25 a share.
That seems like a big deal until you realize the increased dividend works out to a yield of 1.6%, 25% less than the dividend paid by Texas Instruments (NYSE:TXN) and 50% lower than Intel‘s (NASDAQ:INTC).
Furthermore, Qualcomm’s free cash flow averaged $5.4 billion in each of the last three years, meaning it spent just 33% on dividends. While that’s the same as Intel, it certainly isn’t the shareholder love they’d have you believe it is. In my opinion, this is like an ancient King throwing crumbs to the peasants. It looks good, but it’s meaningless.
My last example is P.F. Chang’s China Bistro (NASDAQ:PFCB), which announced in mid-February that it is expanding its share repurchase authorization to $150 million from $100 million. Further, the company intends to use all $150 million in 2012.
This would seem to indicate that management feels its shares are exceptionally cheap at the moment and that you and I should be buying the stock. We’d be mistaken. P.F. Chang’s fourth-quarter and year-end report highlights the difficulties its business model has faced for several years now.
Revenues fell slightly year-over-year, to $1.24 billion. That was the good news. The bad news was that operating profits dropped $24 million, or 37%, to $41 million. Business is getting worse, not better. You can put lipstick on a pig (the $150 million share repurchase), but it’s still a pig.
The bottom line: Warren Buffett’s recent foray into share repurchasing isn’t a signal to investors that they are always a good thing. As the Oracle of Omaha will remind you, they’re good only if you buy well below intrinsic value. But companies rarely do. Furthermore, buybacks rarely turn out to be an accurate buy signal for investors.
So ignore the hype and save your money.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.
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