When Stock Buybacks Go Horribly Wrong, by Tyler Durden

SLL has its qualms about stock buybacks (see “Cat Food Dinners,” SLL, 5/22/15), especially six years into a bull market. Here’s what can go wrong, from Tyler Durden at zerohedge.com:

When companies have a burning need to boost their stock price and/or have no organic growth opportunities requiring fresh investment, they do one thing: engage in stock buybacks (usually funded with recently issued bonds). We first warned about the dangers of such a “strategy” in 2012, and most recently, earlier today the WSJ once again noted that “U.S. Firms Spend More on Buybacks Than Factories.”

The reality is that stock buybacks are great… as long as the stock price keeps rising. They are also great as long as the stock isn’t so illiquid that once the sole buyer withdraws, be it the company itself or its CEO (in the case of Hanergy using corporate funds) the stock crashes.

The real problem emerges when after sinking hundreds of millions, or more, in stock buybacks, the stock no longer keeps rising.

This is precisely what happened to KORS stock. As Dominique Dassault points out, earlier today Michael Kors reported abysmal earnings which have lobbed a whopping 23% off the stock price and the market cap of KORS just today.

But it was not KORS’ operational issues that were troubling: it is how much the company burned on stock buybacks. In KORS’ earnings release we read:

During the quarter, the Company repurchased 1,409,682 shares of the Company’s ordinary shares for approximately $92.0 million in open market transactions

This means in the quarter ended March 31, KORS spent $92 million supporting its stock ahead of what it knew would be an earnings debacle. It also means that its average purchase price was $65.3/share in Q4, or 40% higher than KORS’ last trade at $46.50.

But that’s not all. Last quarter, after authorizing $1.5 billion for stock repurchases, KORS reported the following:

During the quarter, the Company repurchased 5,068,813 shares of the Company’s ordinary shares for approximately $399.9 million.

In other words, KORS’ average price in Q3 was $78.9, a 70% premium to the current market price.

http://www.zerohedge.com/news/2015-05-27/when-stock-buybacks-go-horribly-wrong

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