Companies Bought High, But Won’t Buy Low

Regarding our uses of cash in the quarter, capital expenditures were $49 million. We paid out dividends of slightly over $21 million and we repurchased 475,000 common shares for $25 million….

While we believe we have access to ample liquidity, we think it is prudent to so suspend our share repurchase program for the time being.

—Charlie Cooley, Treasurer, Lubrizol, October 30, 2008

Sharp-eyed readers who do the math implied in the quote above ($25 million spent buying back 475,000 Lubrizol shares = $52.63 per share) and then check the Lubrizol share price on their Google Finance ($37.58 last trade), will no doubt scratch their heads at the bizarre logic contained in the above commentary from Lubrizol’s treasurer.

Lubrizol happens to be a sleepy specialty chemical maker with a decent franchise in fuel additives. As the price of crude oil tripled in the last couple of years, so Lubrizol’s cost of goods soared, crimping margins as well as the recent stock price.

Yet now that Lubrizol’s share price has declined along with everything else in this fear-crazed environment, the company is saying “We bought our stock at $52.63 a share, but we will not buy stock at $37.58 a share.” (For the record, Lubrizol shares traded as low as $34.25 and as high as $38.39 on Friday, when the statement was made.)

Fortunately, after several years of being asleep at the proverbial switch, Wall Street’s Finest are spotting the fallacy contained in the inherently illogical notion that companies who bought their shares near their all-time highs a few short months ago—under the “returning value to shareholders” mantra—are too scared to buy the very same stock at far lower prices today.

In fact, one of those Finest asked exactly the question of Lubrizol management that all such former members of the Returning-Value-To-Shareholders Club should be asked.

We reprint the dialogue courtesy of the indispensible StreetEvents:

Jeff Zekauskas – JPMorgan – Analyst

And lastly, you said that you bought 475,000 shares…and you spent $25 million, so you bought them at $52 a share. Your outlook is I guess the same as you thought it was, but you are suspending your share repurchase now that the stock is at $34. Do you think that that is — do you think that that is a prudent thing to do?

Charlie Cooley – Lubrizol – SVP, Treasurer & CFO Fair question. And as you know, Jeff, we have been asked this question during the course of the year, asking why our share repurchase program has been as kind of methodical and systematic as it has been. We have never viewed the share repurchase program as primarily being a tool of making a call on our share price. Rather we see it as a way of balancing our use of cash and adjusting [our] capital structure…. This is all about maintaining the strong financial help that we have enjoyed for years. So it is suspended temporarily and we will look for an opportunity to get back into a share repurchase mode.

We’re not sure exactly what Mr. Cooley meant by “balancing our use of cash and adjusting [our] capital structure.”

We think it means, “We bought high, and now we’re too scared to buy low, but we don’t want to say so on a conference call.”

Other interpretations are welcome.

Jeff Matthews I Am Not Making This Up

© 2008 NotMakingThisUp, LLC

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews’ recommendations. This commentary in no way constitutes investment advice. It should never be relied on in making an investment decision, ever. Nor are these comments meant to be a solicitation of business in any way: such inquiries will not be responded to. This content is intended solely for the entertainment of the reader, and the author.