Companies With Profitable Stock Buybacks

Most public companies have two ways to reward their shareholders: dividends and share repurchases. While dividends are looked upon as a quarterly affair, share repurchases are a much more sporadic and ambiguous form of thank you. Sporadic in the sense that there is no timetable for making these repurchases and ambiguous because often the buybacks are less a reward than a cover up for excessive option compensation. Most importantly, a dividend is easy to evaluate, as it is a number that's open to interpretation. Share repurchases, on the other hand, are rarely examined for their efficiency. How adroitly does management use excess cash to reduce its share count? How much did it pay to buyback its shares? What could it have paid? At the end of the day, this exercise demonstrates why CFOs would make terrible money managers.

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A History Of Poor Decisions
In reality, share repurchase decisions aren't exclusively made by the CFO, but rather through the entire C-suite and board of directors. However, the head of finance usually pulls the trigger. Like everything in life, there are good examples and bad ones. I'll examine some recent decisions using the apparel industry as a backdrop. One scary piece of information: S&P 500 companies spent $1.78 trillion to repurchase shares between the fourth quarter 2004 and the end of 2008 and ostensibly all of it was financed by debt. The last time I checked, share repurchases should really come from excess cash. I hope you didn't think the S&P 500 was a conservative investment.

Apparel Companies and Latest Fiscal Year Share Repurchases

A Fiduciary Duty

As far as I'm concerned, investors should always analyze how a company spends its cash, excess or not. Whether it's a dividend, share repurchase, capital expenditure or acquisition, it's important that CFOs don't over indulge. Overpaying today means less for tomorrow. As stewards of our capital, companies must do the best possible job of allocating capital. Period. 

Winners and Losers
In order to compare each of the above, I'll determine what they might have paid for their share repurchases and how well those shares have done since. First up is Ralph Lauren. In 2008, it paid $67.92 a share for its repurchases while the average price during the year was $59.15 and its low was around $43.03. Acknowledging that it's near impossible to buy at the bottom, I'll suggest it overpaid by 15%, leaving $21.93 million on the table. While not good, it's a reasonable effort given the shares sit at $76.91. At least Ralph has made decent money on its investment. VF, viewed by many, including Jim Cramer, as one of the best companies in retail, paid $74.86 per share for its stock while its 12-month average price was $66.70, overpaying by $16.32 million. Unfortunately, for VF shareholders, its stock is up only 40% year-to-date compared to 70.7% for Ralph.  

A huge winner in this exercise is Phillips-Van Heusen. It didn't repurchase any shares in 2008, so I'm using those from 2007 instead. Its average share price was $52.45 but it paid $38.35 to repurchase 5.2 million shares, which is close to its 52-week low for the year. It effectively underpaid by $73.3 million. It would be hindsight to suggest it should have made the purchases in early 2009, when it could have got them for less than $20. That would be asking too much. Considering it's had a tough go the past couple of years, this was an extremely good move in my opinion.

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Bottom Line
Most investors who buy quality stocks will tend to brush past the bottom three in the table above, heading straight for Ralph Lauren and VF Corp. That would be a mistake. Phillips-Van Heusen and Warnaco both merit consideration based upon their stewardship of capital. (To learn more, see our CFA Level I Study Guide - Corporate Finance.)

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