Investors have not given Hewlett-Packard (NYSE:HPQ) much respect of late. Tuesday the stock price declined over 11% to close at $11.70. The 10-K shows that during August 2011 Hewlett was buying shares at $31.51.
The market value of Hewlett-Packard is now roughly $23 billion, and the board has an outstanding share repurchase authorization of roughly $9 billion, or nearly 40% of the firm at current prices. Some might view the share repurchase program as a positive. Before jumping to that conclusion. Let's review the past performance and consider how the bondholders might feel.
During fiscal years 2009 through 2012, Hewlett repurchased $27.8 billion worth of stock, source data 10-k filings. That is more than the current market value of roughly $23 billion. In theory those that sold stock, (after paying 15% tax on all $27.8 billion), would have $23.63 billion and could buy the entire firm with nearly a billion dollars to spare.
The theory of stock repurchases suggests that it increases the value of shares, right? If true, how can the share price be lower than the value of stock repurchased? Could there be a flaw in the share buyback theory?
What has happened to long-term debt? At the end of fiscal year 2008 it stood at $7.7 billion and at 2012 was $21.8 billion. Long-term debt grew by $14.1 billion. Source data 10-k filings.
What happened to shareholder equity? At the end of fiscal year 2008 it was $38.9 billion while at fiscal year 2012 it stood at $22.8. Shareholder equity declined $16.1 billion. Source data 10-k filings.
During FY 2012 $1.6 billion was used to repurchase 66.6 million shares, or an average cost of $24.46. Today those 66.6 million shares are worth $779 million, or $820 million less. Investors that prefer share repurchase should not have to worry about paying capital gains taxes, as the share price is near a decade low and set a new low for 2012.
At the current dividend rate of $0.52 and the stock price at $11.70 the dividend yield is 4.4%.
Who is right about the value of the firm, the market or the board? Clearly the board feels the firm is worth more that the market. After all the board has spent nearly $14 per outstanding share buying back stock and has authorization outstanding equal to roughly $4.50 per share.
The risk profile for bondholders has increased as the debt to equity metric has expanded and Hewlett reported a net loss. It shall be interesting to see what happens with the stock and bond prices. For now bondholders might hold the advantage, and they might be somewhat nervous. Time will tell, at what price (interest rate) they will demand to roll over the debt or if the board and management will focus upon reducing the debt and rile up restless and frustrated stockholders.
If Hewlett would announce that the share repurchase authorization has been cancelled and won't be returning and commit to paying say 30% of earnings to owners via a cash dividend with the remaining 70% committed to reducing debt or growing the business then the stock might be an interesting investment. Until then, it will be on the radar for a trading opportunity but not an investment. Bonds would be the preferred investment choice.
Source data: SEC filings.