Companies that spend billions of dollars buying back their shares are usually rewarded with higher stock prices. That’s the theory, anyway.
But on Real Money Pro, Stephen “Sarge” Guilfoyle recently questioned whether one big DIY retailer was going overboard.
Lowe's Companies (LOW) balance sheet could be improved if the company spent less money buying back shares and lowered its debt levels, argues Guilfoyle.
“I'm not going to lie to you,” Guilfoyle wrote in a recent column. “I'm not crazy about the balance sheet. I am not saying that Lowe's can not pay their bills. Not even coming close to that.”
Indeed, the company’s performance during the fourth quarter was strong, as revenue grew by 5.1% year over year. Lowe’s gross margin rose to 32.93% of sales from 31.78% a year ago while operating income increased to 8.67% of sales from 7.5% a year ago, Guilfoyle noted.
But Lowe’s has been spending lots of money buying back shares. The company repurchased 16 million shares in the fourth quarter for $4 billion. For 2021 as a whole, Lowe’s repurchased $13.1 billion, more than $1 billion over forecasts. On top of that, the company also spent $551 million on dividends during the year.
Thanks in large part to the share repurchases, the company’s net cash position has decreased significantly from a year ago to $1.4 billion from $5.2 billion.
What troubles Guilfoyle is that Lowe’s is keeping up the pace, estimating it will spend another $12 billion in share repurchases for FY 2022.
Lowe’s “appears to have positive cash flow, but [has run] for a couple of quarters now with a negative tangible book value.” Guilfoyle wrote. “I am thinking maybe they could buy back less stock, but hey, I am old-fashioned,” he added.
