How to Blow Shareholder Cash: Spendthrift HP Plans $10B Share Repurchase
It's been a big spending month for HP (HPQ). First it entered a bidding war with Dell (DELL) to acquire storage company 3PAR (PAR) and got to $30 a share, or $2 billion. Today, HP's board authorized a stock buy-back of up to $10 billion. Suddenly the stock was up 3.5 percent.
Investors have a short attention span, and the board counted on this move to divert from the flood of negative publicity the company received with the resignation of CEO Mark Hurd. It's hardly the first time HP has done this. The problem is that the company is potentially involving large sums of money that could cut into its cash war chest.
By looking at the large repurchase increases and comparing them to what was happening in management at the time, you can see the pattern pretty clearly:
- In 2001, after the merger of HP and Compaq in the Carly Fiorina era, the board authorized $1.8 billion for the repurchase of shares.
- In 2002, the board authorized $1.4 billion for common stock share repurchases as the two entities together had about $81.7 billion in revenue for fiscal 2001.
- In 2003, the board $1 billion for common stock repurchase.
- Stock repurchase was $1.3 billion in 2004.
- Common stock repurchase activity jumped to $4 billion in late August 2005.
- There was no announced additional repurchase money in 2006.
- In 2007, the board authorized $8 billion for common stock repurchase. At that point, there were 2.8 billion shares outstanding.
- The board authorized another $8 billion in 2008, with 2.5 billion shares outstanding.
- There was another $8 billion in 2009.
In 2005, it was the same year that the board fired Carly Fiorina. In 2006, there was the big enormous stink over board chair Patricia Dunn having authorized an investigation into some reporters and board members over leaks of information during the Fiorina affair the year before, and former CEO Mark Hurd became chairman of the board on Sept. 22, 2006. However, the board voted for $8 billion for repurchases the next year, double the previously largest amount. That amount stayed high as executive compensation swelled, even as corporate performance stalled and dropped. The next jump? Today's, not long after the resignation of Hurd.
In other words, every time there's been a major management scandal over the last decade, the board ups the repurchase plan. In theory, the practice reduces dilution from the shares used in acquisitions and in employee compensation plans, so more value goes to the remaining shareholders. Unfortunately, as of the end of July, HP had $14.7 billion in cash and cash equivalents, according to Google Finance. Now, realistically, the company is unlikely to actually spend all that it has allocated:
As you can see in the issuance/retirement of stock category, there has yet to be a year in the last few where the company broke $8 billion in repurchases. However, compare that chart to the current assets by year:
Notice that in the years with particularly high stock retirement from repurchases, there was also a large dip in cash equivalents. So what if the amount of stock is reduced by even 200 million shares? Out of 2.3 billion, that's only 8.7 percent. Objectively, it's not enough of an increase of earnings per share to risk being low on cash when your competitors are the likes of Apple (AAPL), Microsoft (MSFT), Dell, Cisco (CSCO), and IBM (IBM). Given that the board and management have done some pretty bone-headed things in the past, expecting that they could exhibit only rational and prudent reactions does seem a flight of fancy.
Related:
- Intel Woes and HP-Dell Wars Show the March of the Dinosaurs
- HP and Dell in War over 3PAR Acquisition -- and Big Corporate Sales
- HP Tries To Exorcise Mark Hurd's Ghost with Strong Earnings
- The HP CEO Scandal: The HP Board Was Engulfed in Fear
- The HP CEO Scandal: Six Lessons Every Company Should Learn