Wednesday, May 21, 2008

Stock Buyback Reduction Versus Dividend Cut

Given the high level of stock buyback activity over the last few years, should a company's reduction in its buyback program be viewed similar to a dividend reduction? If nothing else, significantly more weight should be applied to a company's dividend practice versus its buyback intentions when evaluating stocks. A company that is committed to growing its dividend finds it less palatable to cut a dividend versus reducing or eliminating a buyback program.

I good example is Home Depot's (HD) first quarter 2008 earnings release earlier this week. In a discussion with the Wall Street Journal, the company's CFO noted:
"the second half of Home Depot's $22.5 billion share-repurchase program remains 'on pause just because of the instability of our business and the instability of the credit markets.'"
The other caution is the potential distortion in financial ratios that involves shares outstanding in the calculation. Ratios like P/E and EPS, just to name a few, may not reflect the underlying trends within a company. The reason is shares outstanding are in the denominator a number of different ratios.

For an investor, slowing dividend growth and buyback program reductions can be used to evaluate potential earnings difficulty on a forward looking basis.


Home Depot Net Falls 66% As Store Growth Brakes ($)
Wall Street Journal
By: Ann Zimmerman & Marry Ellen Lloyd
March 21, 2008

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