Timberland (NYSE:TBL), the maker and marketer of hot footwear and apparel, announced plans last night to split its shares two-for-one and to extend its repurchase plan. The stock split will surely please some investors, though it really means little. On the other hand, the latter move will give us another opportunity to discuss stock buybacks and what investors should think about them.
Timberland's release contains an interesting wrinkle. A doubling of the number of shares its board has authorized it to buy was made to coincide with the stock split. It makes sense. If, for example, a company has 1 million shares outstanding and permission to buy back up to 100,000, chances are that the second figure is a function of the estimated dollar value of those shares -- it's not just a convenient number, though that's the way the company's filings read. (Some companies discuss their buyback plans in terms of dollar value rather than number of shares.)
So if said company splits its shares, its total outstanding becomes 2 million. To reflect the same intended dollar value, the company would need to double its authorized amount as well. That's precisely what Timberland has done. As a result, however, this particular bit of news has about as much financial impact on the company as does a stock split: roughly none.
That doesn't mean that investors in Timberland -- and other companies -- shouldn't follow buybacks closely. As management noted after the company's excellent fourth quarter, buybacks can help a company grow earnings per share without growing net income. In Q4 of last year, EPS grew more quickly than did net income for precisely that reason.
But buybacks are also a use of company cash. Last year, Timberland spent nearly $132 million buying back 2.2 million shares of its own stock. That's money that could have been spent any number of ways -- on expanding business lines, or acquisitions, or plush luxury helicopters -- or not spent at all. Watchful investors will consider buybacks when determining whether a company's management is spending their money wisely.
The good news is that useful data isn't too far away. In Timberland's most recent 10-Q filing, for example, the company tells us how many shares it bought during the quarter (read "Note 12") and, in the cash flow statement, exactly how much it spent on them. Using that and other data, you can come up with an average price.
Generally speaking, this information is very much worth tracking. If a company you own routinely buys back large amounts of shares at prices you wouldn't touch so that it can boost EPS without actually improving the bottom line, chances are it's a company you don't want to own. Luckily for Timberland investors, its very solid recent performance suggests that isn't the case.
Fool contributor Dave Marino-Nachison doesn't own shares of Timberland.
