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Micron Announces a Secondary Stock Offering; Wal-Mart Reveals a Big Buyback

By Motley Fool Staff - Oct 14, 2017 at 12:20AM

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Investors never like it when a company they own dilutes the value of its outstanding shares, but everyone likes the reverse.

In this segment from the Market Foolery podcast, host Chris Hill and Motley Fool Asset Management's Bill Barker discuss why chipmaker Micron (MU -2.95%)  is going back to the equity markets to raise $1 billion.

News of the pending stock sale naturally sent its shares down, but only about 1%, and when your shares have nearly doubled on the year, you've got a bit of breathing room on that front. Meanwhile, Wal-Mart (WMT 0.86%) shares saw a major jump after the company said it will repurchase $20 billion of its stock. That leads the Fools into a deeper discussion on the remarkable history of the world's largest retailer, and their views on current management.

A full transcript follows the video.

This video was recorded on Oct. 11, 2017.

Chris Hill: Let's move on to Micron Technology. Shares of the chipmaker down a little bit this morning, after the company announced plans for a $1 billion secondary stock offering. Micron says they're going to use the money to pay down the company debt. No one really likes a secondary stock offering, except for, obviously, the company itself. But when you look at the stock selling off, it's because it's dilution, and we don't like dilution.

Bill Barker: Yeah, it's a supply and-demand equation, where there are more shares available, supply is greater, and therefore the demand is going to take a hit. On the price, it's really only off about 1%. The stock is up 91% for the year, so this makes a world of sense, where you have not necessarily an excessive amount of debt -- I think it's about $9 billion that Micron is carrying on the balance sheet for long-term debt. Why not take advantage of a stock that's up double over the year, and more than that over the last couple of years? It changes the capital allocation question a little bit, raises the floor. That is, if things go wrong and you're holding a lot of debt, those are bad times to be. And these are good times. So take a well-enhanced stock price, convert that into some cash, and pay down some debt. I think it not only makes sense, but the market is not treating it with any great amount of panic.

Hill: Speaking of capital allocation, Wal-Mart yesterday announcing a $20 billion stock-buyback plan. And between yesterday and today, shares of Wal-Mart are up something like 6%, which, for a company of Wal-Mart's size, that's like shooting to the moon for Wal-Mart.

Barker: Yes, exactly. It's the other side of the equation, where you're taking shares out of the market by buyback, you're increasing the earnings per share, because share is the denominator in that equation, so that helps support the future earnings-per-share numbers for the company. It's priced at about 20 times trailing earnings at the moment, which is a little bit cheaper than the market multiple, which is more like 23. So they're not going to buy back all these shares today, obviously, but they've got the cash to do it. The expansion of stores that are on the books doesn't really call for a whole lot of that cash. They're investing in the online operation, obviously, and that has been pretty well received. And I think that was also a big part of the move yesterday with the story of the online operation.

Hill: Doug McMillon is doing a really good job with that company. You look at shares of Wal-Mart, over the last 12 months, the stock is up about 26%. And if they keep that up, if that continues to tick up, not that this is anything that is in any way meaningful for investors necessarily, but I think you have to put Doug McMillon on the short list for CEO of the year. When you just think about where Wal-Mart has been for so long, both as a brand and as a stock, and the fact that he came in a couple of years ago and engineered that acquisition with, and, as you said, the guidance that they gave for online sales yesterday, along with the $20 billion stock buyback, that helped really boost the stock.

Barker: So, returning it to its glory days, in a sense, between 1974 and 2014, some data that I'm gleaning from an article that I'm going to recommend to people, Wal-Mart's stock was up 23% a year. Those were the returns.

Hill: Per year?

Barker: Per year. For four decades.

Hill: That's a hell of a ride.

Barker: That would turn a $10,000 initial investment in '74 to $45 million 40 years later. That's the power of compounding. Wal-Mart has taken a breather -- had, at the very least, taken a breather. And I wouldn't expect 23% annualized returns to appear again over a period of four decades, because the growth that Wal-Mart had available to it in the 1970s is clearly not the same today. Competition from Amazon is significant, and you don't plug in top-line growth of double-digit numbers into Wal-Mart.

Now, by the way, the 1974 to 2014 was also, large chunks of that period were supported by high rates of inflation. So when we say the stock was up 23%, in an era when inflation was above 10% for part of that time, those are not the same as today's returns, which are supported by 1%-2% inflation. But this is an article from Philosophical Economics, which is a phenomenal space online, and it's about this 1974 annual report, and what you could take from not just looking at what the returns were, but how you would have gone about trying to value Wal-Mart in 1974, and the price you should have been willing to pay for it, which was significantly higher, obviously, than the price that it did go for, even though, in 1974, it was an above-market-multiple stock.

Hill: Send me the link, and we'll put that out on the Market Foolery Twitter feed, share it with the folks.

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Stocks Mentioned

Micron Technology, Inc. Stock Quote
Micron Technology, Inc.
$53.65 (-2.95%) $-1.63
Wal-Mart Stores, Inc. Stock Quote
Wal-Mart Stores, Inc.
$122.63 (0.86%) $1.05

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