Mark Cuban wrote an interesting piece called “The AIG-Lehman-Merrill Lynch Link“. In that article he asks in a comparative way whether there is a link between the failures of Merrill Lynch, AIG and Lehman and their large corporate stock buybacks.
“3 Companies facing cash crunch oblivion. A bankruptcy, an desperation sale and pure desperation. What do all 3 companies have in common ? Share buybacks. Billions and Billions and Billions in share buybacks over the last 18 months”
He goes on to state:
” …..think all 3 companies could have used that cash they spent trying to pump up their stock prices ? All that cash going to people who sold the stocks, huge losses going to those who held the stock. Thats why dividends are far better than share buybacks. At least in this case all shareholders could have gotten something back other than “the bag” remaining shareholders continue to hold.”
Why do companies engage in stock buy-back campaigns? There are various reasons. There is the school of thought that buybacks show confidence in the stock and the company. Of course company CEO’s are not using their own money to buy the shares. Is it a show of confidence or simply a “slight-of-hand” means of driving up the price of the stock and make it look more attractive to analysts, investors and employees? The plights of the the “Wall Street Three” make one suspicious that it is the latter. So is there a direct correlation between large buybacks and a companies financial stability?
I decided to put his implied theory to the test using a company that is in serious trouble but has not yet failed at least in a bankruptcy sense. For the last year I have been writing about the downward spiral of once mighty retail giant Sears Roebuck now known as Sears Holding Corporation(also including Kmart). Sears has been on a brutal financial no brakes down hill freight train ride. SHLD stock has gone from a 52 week high of 152.91 to a low of 67.36. It is currently fluctuating in the mid to upper 90s. Their retail same store sales number have been in steady decline. They are losing market share in asteroid size chunks. Over the last 3 years SLHD has also engaged in large stock buybacks. Let’s take a look. The following are press releases available on the SHLD web site.
Sears Holdings Reports Second Quarter Results(2008)
During the 13- and 26- week periods ended August 2, 2008, we repurchased 5.6 million and 6.0 million of our common shares at a total cost of $437 million and $477 million, respectively, under our share repurchase program. As of August 2, 2008, we had remaining authorization to repurchase $206 million of common shares under the share repurchase program. Share repurchases may be implemented using a variety of methods, which may include open market purchases, privately negotiated transactions, block trades, accelerated share repurchase transactions, the purchase of call options, the sale of put options or otherwise, or by any combination of such methods. Timing of repurchases is dependent on prevailing market conditions, alternative uses of capital and other factors. Since the third quarter of fiscal 2005, when our repurchase plan was first approved, we have repurchased approximately 38.7 million of our common shares at a total cost of $4.8 billion pursuant to the program. As of August 2, 2008, we had approximately 126 million common shares outstanding.
It probably not fair to say this in itself is the sole predictor of financial doom. When we add massive talent defections, plummeting sales with no end in sight, skyrocketing inventory, massive markdowns and “red light” clearance gimmicks and real estate holdings worth a fraction of their original value, the correlation certainly strengthens.
Is SHLD going the way of “The Wall Street 3″ ? If it does I do not think we will be seeing a federal bailout. From the looks of the suits Barrack Obama wears I do not think he shops at Sears. Maybe their online preesnce will save them. You can bet John McCain will not be hitting their web site. I hear he is still shopping from a 1960 Sears Roebuck Catalog.