3 Companies That Burn Cash Worse than the New York Yankees

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The New York Yankees, according to Business Insider, spent $258 million on payroll in 2013 — $3 million per win. The highest-spending playoff team (Dodgers) paid out $2.5 million per win. By contrast, the Oakland A’s won 11 more games than the Yankees yet spent 80% less per win.

You see, there’s smart spending … and there’s Yankee spending.

Corporations aren’t much different. Some allocate capital effectively; some don’t. Share repurchases are a good indication of this. Is their buyback program like the Yankees, or the Athletics? I’ve gone in search of three egregious examples.

FactSet Research Systems publishes Buyback Quarterly, a quarterly review of the share repurchase activities of S&P 500 companies. Its share repurchase discount example compares the average buyback price of a company’s stock over a 52-week period with the average share price over that same 52 weeks. For example, Discovery Communications (DISCA) repurchased its shares at an average price of $53.14 between Q3 2012 and Q2 2013. During the same period, its average stock price was $65.89, meaning it bought its shares at a 19% discount.

I’m interested in the opposite — companies that buy back their stocks at a premium, which investors should avoid.

Bad Buybacks

This first example is an oldie but a goodie. I speak of JCPenney (JCP), the venerable department store that can’t seem to find its way. Early in 2011, the board authorized a $900 million share repurchase program. Over the next few months, JCP repurchased 24 million shares at an average price of $32.22. Its average share price in 2011 was $37.50, and now the stock trades below $10 per share.

In just 22 months, JCP’s $900 million investment has been reduced to $212 million. It could sure use the money right about now …. oh wait, the company is currently being sued for selling 84 million shares to replace those funds. JCPenney is definitely the prime example in the argument against share repurchases.

Given that the S&P is up more than 20% year-to-date, it’s hard to find companies that are egregiously overspending in 2013. In the first two quarters of the year ended June 30, Goldman Sachs (GS) repurchased $3.12 billion of its stock at an average price paid of $151.68, 3.5% higher than its average share price during the same period. It might not seem like a lot, but when many firms have been buying back at a discount, I thought it was worth noting.

In the longer term, GS has done a better job buying back its stock. Since the beginning of 2010 through the end of June GS has repurchased $18 billion at an average price paid of $133.14. That’s a 1.6% discount to its average share price over the same period. That’s not anywhere near what DISCA, is doing but at least it didn’t pay more than necessary.

An March 2012 article by InvestorPlace editor Jeff Reeves highlights 17 companies from the S&P 500 that consistently repurchase their shares. It made writing this article much easier, and it’s a good resource for investors.

Big Spenders

From the list of 17, Pfizer (PFE) is the stock that stands out the most. It paid $18.2 billion over the last three fiscal years, buying back 869 million of its shares at an average price of $20.98. Its average share price over those years was $18.09, meaning it overpaid by at least 16%. It did a little better in the first six months of 2013, paying $28.21 per share for $7.9 billion of its stock while the average trading price was $27.89. It didn’t get a deal, but it didn’t really overpay either.

Proponents of share repurchases will point out that Pfizer’s return from its $18.2 billion investment is 38% as of October 2. While that’s true, if Pfizer had done a better job (saving $2.89 per share) buying its stock in the past three years, it would have an additional $2.5 billion to allocate as it saw fit. That’s not what you’d call chump change.

Two other big spenders worth mentioning are Coca-Cola (KO) and Oracle (ORCL). Between them, they’ve spent $30 billion buying back stock over the last three years. Coke paid $34.39 for each share it repurchased, 5.1% more than its average share price; Oracle ponied up $30.65 for every one of its shares, 6.2% higher than its average share price. Doesn’t seem like much? Think again. If it paid $2 less per share, Oracle would have saved enough money to host America’s Cup … twice.

Back in August, Gene Marcial of Forbes discussed the concept of the buyback ratio. Specifically, he highlighted the S&P 500 Buyback Index, a list of 100 companies who have bought back the most stock in the last 12 months as a percentage of their total market capitalization. LPL Financial’s chief market strategist Jeffrey Kleintop believes that companies who are aggressively buying back stock will be the ones outperforming the index in the months ahead.

For the first seven months of 2013 through the end of July, the S&P Buyback Index achieved a total return of 25.4% compared to 15.7% for the index itself. Kleintop sees the buyback strategy tempting individual investors back into the market. I sure hope he’s right, because the markets will only move higher if individual investors finally begin to participate in the multi-year bull market.

Bottom Line

There are a lot of big spenders when it comes to share repurchases. Most do an adequate job repurchasing their shares. A few, such as Discovery, are careful with their money and spend like the A’s. But plenty of others — like Pfizer, Oracle and Coca-Cola — drop cash like the Yankees. And that’s not a good thing.

As of this writing, Will Ashworth did not own a position in any of the aforementioned securities.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.


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