Home Depot Goes Shopping

Home Depot (NYSE: HD  ) has a holiday surprise for shareholders: more share buybacks. Just days after rival home-improvement retailer Lowe's (NYSE: LOW  ) announced that it would repurchase up to $1 billion of its own stock, Home Depot said today that it has completed its current $1 billion buyback, and that the board authorized another $1 billion in share repurchases.

The company has bought back $3 billion worth of stock since July 2002, so this new authorization will mark $4 billion in total repurchases. Home Depot's certainly got the money, with $4.9 billion in cash sitting on its balance sheet as of Nov. 2. It's also solidly free cash flow positive, generating $3.6 billion in excess green through the first nine months of the year. Returning value to shareholders through share buybacks seems like a good use for the company's war chest.

The only question is whether Home Depot's stock is undervalued. Warren Buffett, who has generally praised share repurchases as a means to enhance shareholder value, has warned against companies buying back their stock when it's too richly priced. This was the same concern raised by Jeff Hwang Monday regarding Lowe's buyback news.

Home Depot's going for around 19 times earnings, with expectations of 15%-17% earnings growth for the current fiscal year (ending Jan. 2004). That's before considering the effects of the new share buybacks, should they commence during the fourth quarter.

Given the strength of the business and the balance sheet, and the fact that the stock isn't ridiculously overvalued, this is another positive development for shareholders. It's really just icing on an already great year, during which Home Depot shares have climbed from $20.20 in February to around $34 today.

To learn more about share buybacks and why they're valuable, check out these articles by Zeke Ashton:The Power of Buybacks,Buybacks: The Invisible Yield, andDell's Hollow Buybacks. Or talk about Home Depot on the company's discussion board.


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