Deconstructing Lowe's Buyback

In the midst of a home improvement war, Lowe's (NYSE: LOW  ) took time out this morning to announce plans to repurchase up to $1 billion in stock, and to declare a quarterly dividend of $0.03 per share. According to the company, both are "appropriate and efficient ways to return capital" to shareholders, given the company's continued growth and healthy balance sheet.

Makes sense. Just look at the headlines over the past three quarters:

"Lowe's Q3 Raises the Bar," "Lowe's Sturdy Q2," and "Lowe's Raises the Roof" all speak to the company's exceptional performance, as it continues to bite into Home Depot's (NYSE: HD  ) market share. In addition to growth in sales, earnings, and cash flow, headlines like these reflect impressive same-store sales and a stock that is up 65% off its February lows.

But the company said something else:

Our share repurchase program will also allow us to offset the dilutive impact of employee stock options and enhance overall return to shareholders.

That's debatable. A few years ago, we chided Microsoft (Nasdaq: MSFT  ) for "offsetting" dilution from stock options by buying back overpriced stock. When your company overpays to repurchase shares, it is costing you. And at about 24 times this year's earnings, Lowe's isn't cheap.

On the other hand, even if we question the extent to which buying back now "enhances the overall return to shareholders," it's not particularly expensive, either. Bottom line, we'd prefer that companies buy back underpriced shares, but this is all clearly reflective of Lowe's solid business execution.

Discuss the share repurchase program on the Lowe's board. Only on

Jeff Hwang can be reached at

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