Lost in the sturm und drang of the woes at names like Best Buy (NYSE:BBY), Hewlett-Packard (NYSE:HPQ) and Dell (NASDAQ:DELL) is a very disturbing story: cash-flow scenarios and share repurchasing plans that don’t seem to mesh at any of these companies.
I know, I know. Boring topic. But at a time when everyone and his uncle is reminding investors that they have so much cash on their balance sheets, they can’t help but buy back stock — Exxon Mobil (NYSE:XOM), Microsoft (NASDAQ:MSFT) and Wal-Mart (NYSE:WMT) come to mind — there’s a lesson to be learned:
Buybacks aren’t for everyone, and in some cases, they’re totally counterproductive.
How so? First, let’s take the aforementioned list of sturdy dividend payers: They all have stellar balance sheets, tons of cash and, more importantly, great free cash flow. They almost can’t spend it all, and the buybacks — while they look like astronomical numbers — don’t overly tax the checkbook.
Meanwhile, Best Buy, Hewlett Packard and Dell are either at or moving toward the other end of the scale — out-of-whack balance sheets, squeezed or nonexistent margins, lower cash flow and increased borrowing to pay for the problems.
What’s going on is akin to refinancing your mortgage over and over again in a declining housing market, then plowing the money into home remodeling jobs in the hopes the price will one day go up enough to make it all back. Bad idea.
Let’s take a look at how “cash burn” is forcing the action at all three companies (in thousands):
| Hewlett-Packard | Dell | Best Buy | |
| CASH FLOW | $12,058,000 | $4,428,000 | ($286,000) |
| Capex | ($4,539,000) | ($675,000) | ($766,000) |
| Investments | ($28,000) | ($2,943,000) | — |
| Dividends | ($844,000) | — | ($1,531,000) |
| NET CASH FLOW | $6,647,000 | $810,000 | ($2,583,000) |
| Stock Buybacks | ($9,221,000) | ($2,667,000) | ($1,433,000) |
| NET CASH BURN | ($2,374,000) | ($1,857,000) | ($4,016,000) |
| Borrowing | $8,336,000 | $3,250,000 | $509,000 |
| TOTAL DEBT | $30,000,000 | $9,000,000 | $2,000,000 |
| DEBT/EQUITY | 72% | 96% | 47% |
Cut through the numbers, and what we find are three companies that are essentially borrowing money to finance stock repurchases.
Now to be fair, all three have some money in the bank: Dell is sitting on $11 billion, Hewlett-Packard around $8 billion and Best Buy with a little under $700 million.
But would these companies ever use their cash on hand to buy back shares? Not likely, as cash is an expensive part of capital structure, and bleeding cash from the balance sheet hurts liquidity ratios. Oh, and even with damaged credit, borrowing costs are still pretty cheap … though perhaps not so much for Best Buy.
And how are those buybacks working out?
Not very well for Best Buy, according to a chart by Covestar and reprinted at Market Playground. The data indicated that BBY’s repurchase history is poor indeed — BBY spent $9 billion during the past 30 months buying its stock on the open market for an average price of $30 per share, yet the stock has lost nearly 60% in that period.
Same goes for Hewlett-Packard and Dell. Of the $45 billion authorized by Dell’s board since 2007, only $6 billion remains available, and HPQ has authorized $29 billion in buybacks during the past four years. Meanwhile, each has shed roughly 60% in the past five years.
Granted, if they continued repurchasing now, they’d be getting the shares on the cheap … but surely the buybacks couldn’t be viewed as great investments considering their track records, and especially if they’re coming off borrowed money.
Making stock buybacks essentially on loan for meaningless earnings bumps that don’t even mask dwindling businesses just doesn’t add up.
Stop the madness, and put your money to better use.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.
