Wall Street's buyback binge continues. Earlier in this earnings season, we brought you news of buyback programs at retailers Staples
Fresh from completing its last buyback of $1 billion worth of shares, Nordstrom
Can it pay?
Not without going (further) into debt, it can't. For while Nordstrom has nearly $745 million in cash in the bank, the firm also carries a debt load approaching $1.5 billion. What's more, trailing free cash flow amounts to just $353 million -- insufficient to cover even half the cost of the buyback program within the allotted two years.
Conclusion: To finance its spending spree, Nordstrom will need to approach its bankers for a loan. And considering the condition of the credit markets right now, I'm thinking the costs of the loan may outweigh the benefits.
Should
it pay?
Reviewing Nordstrom's most recent quarterly results, fellow Fool Ryan Fuhrmann pronounced them "solid." Yet looking at the same numbers, I have to say I am less than impressed with the company's valuation. Maybe I'm too much of a cheapskate to fit in with Nordstrom investors (I certainly don't fit its customer demographic). But a P/E of 17 and a price-to-free cash flow ratio of 33 are both too rich for my blood -- especially when paired with a business where analysts expect to see profits grow at just 13% per year over the next five years.
Granted, I see some logic to the buyback when you compare Nordstrom to its rivals:
P/E |
Price-to-Free Cash Flow |
Projected Growth Rate |
|
---|---|---|---|
Nordstrom |
17 |
33 |
13% |
Macy's |
19 |
31 |
12% |
Saks |
n/a |
negative |
22% |
Dillard's |
9 |
negative |
5% |
Saks, with negative free cash flow, bought back no shares last quarter. Dillard's has not yet reported, so we don't know what it's up to. Macy's -- the most comparable stock -- has a slightly slower projected growth rate and a slightly lower valuation, and is buying back its own shares hand over fist -- $900 million last quarter, and another $1.25 billion slated to be spent by the end of the fiscal year.
But you remember what your mom told you about jumping off bridges, right? Well, it works with share buybacks, too. Just because one of your friends is wasting shareholder capital, buying back overpriced shares, doesn't mean you should do it too. Nordstrom, put your credit card back in your purse. You're better off waiting for a red-tag sale on these shares.
Some of our favorite stocks at Motley Fool Stock Advisor are retailers -- retailers buying back shares, in fact. Find out who's buying shares that are worth owning, by them and by you, when you take a 30-day free trial of the service.
Fool contributor Rich Smith does not own shares of any company named above. Best Buy is a Stock Advisor pick. The Motley Fool has a disclosure policy.