Home Depot’s New Stock Buyback Amounts to 30% of their Shares

There are stock buybacks and then there is the new Home Depot (HD) buyback. In case you are wondering why shares of the home improvement retailer are surging $2 this morning to more than $40 per share on news that was leaked to the market earlier this week with little movement in the stock (the company’s $10 billion sale of HD Supply), it’s because of the company’s new buyback program. Home Depot has decided to couple the $10 billion in proceeds from the sale of their wholesale business with $12 billion from a new senior note issuance to initiate a buyback of $22.5 billion. Yes, that’s not a typo, a $22.5 billion buyback.

Regardless of your view on share buybacks, there is no doubt that they are a hot concept right now. Home Depot’s market cap before today was only $75 billion, so this new buyback is truly enormous, representing 30% of the company’s outstanding shares. The company says it will complete the program as soon as is practical.

In case you are wondering how long that might take, Home Depot repurchased 174 million shares in 2006, for $6.7 billion. Given influx of cash they will be seeing shortly, it’s likely they could accelerate that pace a little bit at the very least. It seems reasonable that they could complete the buyback in three years with no trouble, and perhaps faster if they wanted to really be aggressive.

It remains to be seen what type of impact this could have on the company’s earnings. We know it will be accretive but by just how much is more of a question. Home Depot intends to update its guidance (ex HD Supply) in July. We could dig through the company’s past SEC filings to determine the impact from jettisoning HD Supply from their results, but until we hear whether expectations for the core retail business will have to be slashed yet again, we won’t really have a good idea of how much the buyback will boost the stock’s declining earnings.

Full Disclosure: No position in Home Depot at the time of writing

Enjoy this post? Subscribe and never miss another one: RSS | Email | Twitter

4 Thoughts on “Home Depot’s New Stock Buyback Amounts to 30% of their Shares

  1. Adam on June 20, 2007 at 7:48 AM said:

    I’m all for buybacks, as I think its one of the best ways companies can return value to shareholders… but this one smells a little fishy to me. Maybe its the sheer size of it, its definitely the biggest buyback I have seen since becoming a trader. This one smells of a management team that is bent on damage control… coming right after the announced spinoff of HD supply, the departure of Nardelli… on top of that, we still dont know exactly how much the housing correction will impact HD’s earnings growth going forward. This looks to me like a desperate effort to get people to buy in, ahead of their next quarter results, which could easily be terrible… kind of like when struggling companies raise their dividend to insane levels to tempt people to buy in or hold on when the fundies arent so good.

  2. Chad Brand on June 20, 2007 at 4:04 PM said:

    I think it is telling people that the retail business isn’t going to turn around anytime soon, so this is the best use of their resources for shareholders right now. It is a huge undertaking for a large cap stock. They could have just used the $10B without issuing more debt. Still, investors are likely happy. I’m not sure what else they would want to go along with their 2+ percent dividend. Perhaps 3% but that will likely be upped as well at some point in the not-too-distant future.

  3. Bruno on June 21, 2007 at 10:05 AM said:

    In your view why would the announced stock buyback be better for shareholders than a one-time special dividend?

  4. Chad Brand on June 21, 2007 at 10:19 AM said:

    Hi Bruno,

    It goes back to the discussion I wrote about recently regarding the dividend vs buyback debate.

    In my view (although I don’t own HD) there are several reasons why a buyback is better than a special dividend.

    1) A buyback is accretive to earnings, whereas dividends are not. The result is that the buyback will boost the value of a share of stock. As a shareholder, that is of utmost importance, assuming I am not living off of the dividends and therefore are unconcerned with capital appreciation.

    2) A special dividend really just represents a partial sale of stock. If a company pays out a $5 special dividend, the share price drops $5 on the payment date. You get $5 cash but lose $5 in equity value. You aren’t any better off, rather you simply monetized a portion of your equity investment. You can do that on your own if you want to, so no need for company management to force you into it.

    3) Dividends are taxable. I would not want to pay taxes on a dividend payment today if I could avoid doing so simply by continuing to hold the stock while they buyback shares.

Post Navigation