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What is HPQ management indirectly telling us via share buybacks?



September 09, 2012 – Comments (4) | RELATED TICKERS: HPQ

Admittedly, I've never spent any time working in the financial departments of any Fortune 500 company, but what HPQ has done over the past 3 years, and is currently doing, doesn't seem like it makes a whole lot of sense.

In 2010, the company took out $6B in debt to repurchase $8.5B in shares.  For most of FY 2010, shares were trading around $45.

In 2011, the company took out $8.3B in debt to repurchase $9.2B in shares. For most of FY 2011, shares were trading around $40.

So far in FY 2012, the company has paid down about $1B in debt and has repurchased less than $1B in shares.  The 52 week high was $30/share, but shares have traded well below that price for most of the year, and currently trade below $20.

I realize that authorization of share repurchases are needed, but I think the company is still authorized to buyback a few billion dollars worth, and the company still has about $10B in gross cash.

So what is management trying to say?  They don't have confidence in their ability to generate cash in the coming years?  They are planning to make a big acquisition and need to hoard their cash for now?  They seemed to be pretty confident in the company in 2010 and 2011, and now they are skiddish about share repurchases.

The company is trading with a 20% FCF yield right now, and only 30% of their revenue comes from their PC segment - looks cheap and relatively safe.  But a little more confidence from management would likely go a long way with investors.  If the company isn't purchasing shares right now, I'm not purchasing shares right now.

No position in HPQ, although 20% FCF yields from $100B companies are tough to pass on... 

4 Comments – Post Your Own

#1) On September 10, 2012 at 12:37 AM, awallejr (35.81) wrote:

Well what they are telling you is that they don't know what they are doing with their cash.  Personally I am not a fan of stock repurchases unless the company's stock value is depressed.  Now would be the time to have deployed those wasted billions. 

Take Xerox.  Their stock is selling at a ridiculous low and they are engaging in a massive stock repurchase.  Good.  That is when you should do it.  Apple wants to do it but I'd rather they just pay the money out in a higher dividend. 

Just silly to me to do stock repurchases at a stocks's high instead of at it's low.

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#2) On September 10, 2012 at 4:27 PM, ikkyu2 (98.20) wrote:

Yep, buying something for $40 that's worth $10 is bad management.  Expect to see more of the same.

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#3) On September 10, 2012 at 7:17 PM, somrh (86.44) wrote:


it might not be silly if we digged into managements' compensation package. My guess is that the purpose of the share buybacks was to push up the price to make stock options more valuable. Exercise price is the key.

According to their recent 10-K, they currently have about 86% of their options outstanding with exercise price greater than $20. In other words, less than 14% are "in the money".

The situation was quite different at the end of 2009 (see 10-K). Here about 2/3 of the options had exercise price between $0-40. With the share price sitting between $45-50 at the time, these were all in the money: 66% vs 14% is a huge difference. Management might benefit from share buybacks in the situation at the end of '09. 

So I suppose it is "silly" only if one takes the compensation structure to be "silly". It makes perfect sense given the compensation structure.

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#4) On September 10, 2012 at 10:53 PM, awallejr (35.81) wrote:

Well I was talking from a shareholder's point of view.  But if management wants to manipulate stock options with buybacks that is another matter and shame on them if so.

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