Is Home Depot's Share Buyback At Risk?

Home Depot (HD) had its credit rating downgraded last month because of its plans to tap the credit markets to accomplish its $15 billion share repurchase plan. With the recent credit market tightening out there, will that buyback or a substantial part of it be put on the shelf?

When they announced the ambitious plan, Home Depot said they would accomplish it "as soon as practicable." Which means, well, nothing. They have announced a tender offer for shares, but it remains to be seen how many people actually tender those share to the company. Moody's (MCO) did say yesterday that they may downgrade Home Depot debt even further depending on how expensive corporate lending becomes. Another debt downgrade will have the effect of making borrowing even more expensive for Home Depot.

In July, there was only $29 billion in corporate bonds issued vs. $128 billion in June. The reason? Tightening credit markets have sharply driven up the cost of issuing that debt. Now, the cost still is below historic levels, but that is of little consequence when you announce plans based on yesterday's levels. How has this debt figured into stock buybacks? Last year, $602 billion in shares were repurchased and corporations issued a record $454 billion in cheap new debt to make those purchases. Just last month Expedia (EXPE) cut a previously announced buyback by over 20% saying "lack of available financing, on terms satisfactory to the company." Translation: It was too expensive.

It bears close watching whether or another large debt supported buyback at Proctor & Gamble (PG) of $24 billion will be slowed to a crawl as the cast of it also increases.

Now, not all buybacks out there are being debt financed, but it is safe to say that when a billion dollar company is buying back 20% of it's shares, a large amount of now more expensive debt is involved. Do not take those buyback plans into your thinking when deciding to purchase shares; there is a very good chance the buyback will not be accomplished now.

HD 1-yr chart:

Comments

[Andrew Hor...:]

Todd:

Excellent point and right on the money. I have been pounding the table regarding this issue. It seems to me if you attribute EPS growth to buybacks (enormous buybacks) and all eyes are on earnings, I question what will happen when, and if, buybacks stop...

A great article was written by Howard Silverblatt, Senior Market Analyst at S&P that shows the extent of the buybacks in the US markets. Would you be interested to find out that in 2006 on share buybacks within S&P 500 companies were $432 billion than the United States government spent on Medicare $408 billion? 2007 is looking to smash all records....

Also according to S&P, "buybacks, while adding to short-term returns, are temporary in nature if the shares are not retired - which they have not been. Cash build-ups that are now being used to supplement earnings via interest income and reduce share count are not a substitute for operating earning and, as such, should not be priced into future earnings or multiples."

Link to S&P article: www2.standardandpoors....;vlang=en

Link to Podcast with S&P's Howard Silverblatt: www.thedisciplinedinve.../

Something to ponder... Where do we go from here?

Andrew

2007 Aug 07 10:16 PM