Is Your CFO Sleeping Around?

Before you get too excited (or nervous, if you're a philandering CFO), let me make myself clear: I have no special insight into the sex lives of corporate executives, and -- despite my repeated requests -- The Motley Fool stubbornly refuses to cover celebrity gossip. However, I do have an insight that could help you make a lot of money in the stock market, as well as a clever analogy to justify my salacious title. I'll get to that analogy in a moment, but first, let me set the stage.

Best Buy or bad decision?
Along with a better-than-expected earnings report to close out its fiscal year, Best Buy (NYSE: BBY) proudly announced that it plans to buy back up to $2.5 billion of its common stock on the open market. This news was immediately embraced by investors, who sent the stock up about 4% following the announcement. However, a closer look at the electronic retail giant's history suggests that Best Buy's renewed interest in share repurchases should probably be cause for concern rather than celebration:

Data from Capital IQ and Yahoo! Finance.
*Best Buy's fiscal year ends on the last Saturday in February.

As you can see from the table above, Best Buy began buying back its shares in the late '90s, but ceased once the Internet bubble burst. A few years later, the company tentatively resumed its repurchase plan, accelerating the pace aggressively when the economic coast once again appeared clear. However, after the credit crisis clobbered the stock two years ago, the company did not repurchase a single share.

Only now that the worst appears to be behind us and the stock has rebounded back near its two-year high is Best Buy willing to open its coffers once again. Management may not have destroyed value with its repurchases, but shareholders should wonder why more weren't made when prices were depressed.

Misery loves companies
Unfortunately, Best Buy is far from the only company whose executives have made ill-timed repurchases. Sears Holdings (Nasdaq: SHLD) repurchased nearly $3 billion worth of shares near the market peak in 2007. Between 2004 and 2008, Bank of America (NYSE: BAC) and Citigroup (NYSE: C) combined to buy back more than $55 billion worth of common stock. Think they'd like a do-over?

And while those capital allocation atrocities make Whole Foods' (Nasdaq: WFMI) botched buyback seem like peanuts, it's important to consider the context here. In the first quarter of 2008, Whole Foods bought back $200 million worth of shares at about $44.40 apiece. But later that year, when the company needed capital in the midst of the credit crisis, it was forced to issue $413 million in preferred stock -- at just $14 per share. You don't need an MBA to conclude that Whole Foods' shareholders got a raw deal.

If you're a shareholder of any of these companies, keep their track record in mind the next time they announce buybacks.

Rest assured, there will soon be additions to this share repurchase hall of shame. According to data provided by Dealogic, buybacks at S&P 500 companies surged in the first quarter of 2010, up nearly eight-fold from last year's levels. Will Amazon.com (Nasdaq: AMZN) or Lowe's (NYSE: LOW) live to regret its ramped-up repurchase authorization? I think Lowe's is trading at a discount to intrinsic value, so the buyback could create value for shareholders. Unfortunately, I can't really say the same for Amazon.

I'd really like to hear about promiscuous CFOs now, please
So what in the world do value-destroying share repurchase programs have to do with a CFO's sex life? More than you might think.

Stern School of Business professor Aswath Damodaran has compared companies that sporadically repurchase stock with people who engage in casual sex outside the context of a romantic relationship. "Companies are increasingly addicted to hooking up with stockholders," Damodaran says. "They don't want a long-term relationship."

In other words, you can count on companies like Best Buy to repurchase shares if it's convenient for them, when the future appears rosy and the balance sheet is flush with cash. But when the future is less certain and the company's shares are trading at a discount to intrinsic value -- the time when buybacks would benefit shareholders most -- these companies tend to stand their shareholders up.

"Stock buybacks are like hooking up," Damodaran says. "Dividends are like getting married."

Till death do us part
If you'd like a stock that will return value to you through thick and thin, consider investing in a company that rewards its shareholders with steady dividend payments. As Damodaran notes, dividend payments are far stickier than share repurchases; they're more likely to stay constant (or even increase!) during tough economic times. Importantly, executives are typically committed to keeping their company's dividend intact, which means they're more likely to focus on preserving cash, and far less likely to engage in value-destroying behavior.

But the best reason to invest in dividend stocks is simple: Over time, a dividend-focused strategy has been proven to beat the market, with lower risk. According to Wharton professor Jeremy Siegel, a portfolio of the highest-yielding dividend stocks in the S&P 500 would have produced an annual return of 14.2% from 1957 to 2006, compared with an 11.1% annual return for the index as a whole.

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Rich Greifner occasionally hooks up with the Fool's disclosure policy. Rich does not own shares in any company mentioned in this article. The Motley Fool owns shares of Best Buy. Best Buy and Lowe's Companies are Motley Fool Inside Value recommendations. Amazon.com, Best Buy, and Whole Foods Market are Motley Fool Stock Advisor picks.