Sometimes Less Is More

Companies love to talk about “enhancing shareholder value.” They usually do so when announcing share buybacks that frequently have very little to do with “enhancing shareholder value” and more to do with preventing earnings dilution caused by the generous option grants which the insiders who control the corporate money spigot give themselves, in the interests of “aligning management with shareholders.”

For all the self-congratulatory claptrap, when companies buy back stock it offsets the added shares from all those options grants and helps inflate the “Earnings per Share” calculation so as not to rouse the shareholders’ ire.

According to DuPont’s management, which announced a large share repurchase yesterday morning, the difference between their repurchase and others is that only about half of all announced share repurchases actually get done. (DuPont did not wait around to buy back stock in the open market: instead, the company bought $3 billion worth of stock from a Wall Street firm, which presumably shorted the stock to DuPont.)

One company that probably wishes it had not followed through on its buyback announcements must be Lexmark, the beleaguered printer company which earlier this month announced the biggest earnings miss I can remember at a mainstream technology-related company.

A 50% miss.

Management blamed all sorts of things—but it mainly came down to business falling off a cliff.

I don’t know about you, but in the old days—five to ten years ago—printers were an important part of my computer purchases. They churned out envelopes, labels, letters, and stacks of faxes that came in every morning filled with the research musings of Wall Street’s Finest, all the while consuming gallons of the expensive ink that made Lexmark’s razor/razor blade model so profitable.

But then all that information began to move around in digital form, and the printers piled up around my office like Tequila bottles in the parking lot after a Dave Matthews Band concert.

And HP got its act together. And finally came the mind-boggling earnings miss from shareholder-friendly Lexmark.

On yesterday’s conference call discussing the actual earnings report, the Lexmark folks discussed their active share repurchase program: year-to-date the company has bought back 12.6 million shares at a total cost of $870 million—average price, $68.83.

Yesterday’s close: $39.69.

Negative “enhancement” to the value of Lexmark shareholders: $367 million.

In the case of Lexmark and its share repurchases, less would have been more. DuPont shareholders should hope its management has greater insight into its business than the folks at Lexmark.

Jeff Matthews I Am Not Making This Up

© 2005 Jeff Matthews

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.