GoPro Inc (GPRO) managed to compound the pain of terrible quarterly earnings by betting on itself … with a huge repurchase of GPRO stock that wasted millions of shareholders’ capital.
Business Insider was the first to note how the action camera maker’s attempt to return cash to anyone holding GoPro stock went horribly awry.
Buybacks are very much in fashion these days — unfortunately, that’s only because companies don’t know what to do with all the cash on their balance sheets. They’re certainly not using it for capital expenditures or, you know, hiring people. (Improvements in the labor market are being driven by gains in part-time jobs.)
Dividends are popular too, but because they get taxed twice — once as corporate income and then again as unearned income — share repurchase programs have been the main conduit of financial engineering.
Companies also like stock buybacks because they lift earnings per share without actually increasing earnings.
The buyback craze has gotten so bad that companies in the S&P 500 were on track to spend more than $600 billion on their own shares last year. That’s the highest level of repurchase activity since before the financial crisis.
Add in the cash disbursed as dividends, and S&P 500 companies spent a record of more than a trillion dollars last year — or more than 100% of operating earnings!
GPRO Stock Ain’t What It Used to Be
The big argument against share repurchase programs is that they are too often a colossal waste of capital.
Now, critics can use GoPro stock as Exhibit A.
Warren Buffett famously won’t buy back shares in Berkshire Hathaway (BRK.A, BRK.B) until the stock drops below a strict level of valuation. Indeed, he openly warns shareholders that if they sell to Berkshire under such circumstances, they will get fleeced.
Buffett will only buy back stock when it’s cheap. GoPro stock has been no such thing.
GoPro initiated a share repurchase program in the fourth quarter in an attempt to get restive shareholders to calm down. As GPRO noted in its Dumpster fire of an earnings report:
“Commencing in the fourth quarter of 2015, GoPro has acquired approximately 1.5 million shares of its Class A capital stock at an average price per share of approximately $23.05, representing a total share repurchase of approximately $35.6 million through December 31, 2015.”
GPRO stock tanked another 8% by mid-day Thursday trading to hit $9.85 a share. At that level, the value of the GoPro stock buyback is about $14.8 million.
Subtract that amount from the $35.6 million spent on repurchases, and you can see that GoPro blew about $22 million buying GPRO shares in the fourth quarter.
We’ve long said that GoPro stock is a loser based on the fact that it has no competitive moat. It makes cameras.
This sort of financial incompetence only strengthens the bear case on GPRO.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
