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.
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.