There are many opportunities for companies to mismanage shareholder capital. Overpriced acquisitions, ill-conceived new business lines, allowing cash to gather dust on the balance sheet -- these are all great ways for management to blow it. However, perhaps the most popular and efficient method of obliterating shareholder value is share buybacks.
Last week I shared 28 fascinating facts about share buybacks, thanks to great research from investment bank Credit Suisse. A few readers followed up asking for detail on how specific companies have fared with their buybacks.
Below, I've dug up the buyback dirt on five companies whose stocks are hovering right around their five-year lows. Why these companies? Because if management is savvy about buybacks and willing to buy now, it could be a serious boon for investors. Otherwise, investors may be looking back on millions of dollars blown on buybacks at much higher prices.
1. Pitney Bowes
Perhaps you know of Pitney Bowes because of the massive 10.8% dividend yield on its stock. Or maybe you're familiar with it because you do a lot of mailing.
Regardless of how you know Pitney Bowes, what's all too clear is that in the age of the Internet, the business just isn't what it once was. This shows in the company's numbers. Not only has growth stalled, but it's in reverse. Meanwhile, the stock has fallen about 70% over the past five years.
In the midst of all of this, how has Pitney Bowes' management done when it comes to buying back shares? Not terribly well.
Source: S&P Capital IQ.
The green bars in the chart represent the money spent on buybacks. As you can see, Pitney Bowes spent a whole bunch on buybacks in 2008 when the stock started its plunge, but there's been far less action in recent years, even though the stock has been trading much lower.
The silver lining? Spending less on buybacks leaves management with more cash to keep paying that huge dividend.
2. Exelon
As the king of nuclear-power generation in the U.S., Exelon has attracted many investors with its low cost of power generation and low-emissions footprint. But with a softening in the demand for power and low natural-gas prices pushing down wholesale power prices, Exelon's business has suffered. And the lower profits have dragged the stock down -- way down.
Unfortunately for investors, Exelon's management used the share buyback approach of "buy high... and then stop." The company spent a load of cash on buybacks right as the stock was climbing and then shut down the buyback activity after the stock cratered.
Source: S&P Capital IQ.
This should make Exelon investors skeptical of the company's capital allocation prowess. However, though Exelon doesn't have quite the dividend yield that Pitney Bowes does, its 5.5% yield is no slouch. And as with Pitney Bowes, the money that Exelon isn't putting toward share buybacks right now can be used to backstop that payout.
3. Best Buy
Should you bet on the bricks-and-mortar electronics retailer in the age of the Internet? Over the past couple of years, the consensus from investors seems to be "no," as the company's stock has plunged. Best Buy's former chairman and co-founder Richard Schulze doesn't share that view, and he has offered to buy the entire company and take it private.
But we're talking about buybacks, not business models here, so how does Best Buy stack up? Not all that well.
Source: S&P Capital IQ.
The pattern may be starting to look familiar -- big spending prior to the recession, when the stock price was high, and then less spending at lower prices. And what of Schulze's proposed buyout? The offer was for a range between $24 and $26 per share, which is well below where most of Best Buy's buybacks took place.
4. Avon Products
It's been a long, hard fall for Avon's stock since it traded above $40 prior to the recession. There was a brief glimmer of hope for embattled investors earlier this year when rival Coty offered to buy the company, but a lackluster response from Avon's management led Coty to thumb its nose at the cosmetics giant and pull the offer.
Like Exelon and Pitney Bowes, Avon does have a hefty dividend yield to reel in investors. Unfortunately, management's willingness to hit the buyback button at the right times seems no better.
Source: S&P Capital IQ.
Once more, we could say that the silver lining is that fewer buybacks means there's cash available for the dividend. But for long-term shareholders, that may not soothe the sting of the hundreds of millions spent buying the stock back at much higher prices.
5. GameStop
As much fun as it is to put the spotlight on companies that appear to have botched their buybacks, that's not all I'm here for. When I set out, I had actually hoped to find a company that seems to nail it when it comes to buying back its own shares.
So allow me to conclude with GameStop.
Source: S&P Capital IQ.
From a business perspective, GameStop finds itself in a similar position to Best Buy -- that is, a shifting competitive landscape is taking a severe toll. In fact, my fellow Fool Rick Munarriz asked earlier this year whether GameStop will be "the next Best Buy." So let's be clear what we're talking about here: This is not a business that is thriving and riding a great growth trajectory.
But again, we're talking about buybacks, and GameStop's management seems to have its approach much more dialed-in than the other companies we've looked at. Notice the level of buyback activity when the stock was trading at its highs in 2008: nil, zero, zilch. Between 2006 and 2010, GameStop simply wasn't buying back shares. The last time GameStop was buying back shares was in 2005, and for much of that year the stock was trading at levels below even the depressed levels where it currently sits.
Share buybacks, no matter how well-timed, can't reverse painful business trends. It does seem, however, that GameStop's management team knows when its shares are attractively priced. And management thinks shares are worth buying right now; with $500 million authorized for share buybacks just earlier this year, the company has a significant amount of cash to put to work.
Better bets
Struggling businesses -- even if they allocate capital well -- aren't the right pick for every investor. So if none of the five stocks above catches your interest, you may want to check out The Motley Fool's special report "The 3 Dow Stocks Dividend Investors Need." In it, my fellow Fools lay out the case for three high-quality, dividend-paying businesses. Get your free copy by clicking here.
