When the COVID-19 health crisis hit last spring, Best Buy Co. quickly borrowed $1.25 billion on an untapped credit line, even though it already had $2 billion in the bank.
The company also stopped buying back its own stock.
Companies large and small hoarded cash early on. But while nothing was easy last year, Best Buy didn't end up needing that borrowed money. It paid it all back in July. Best Buy ended up generating roughly twice the cash flow from operations last year as it did each of the two previous years.
It took until late in the year before Best Buy started buying back its stock again, and it bought about 8.1 million shares in just the first six weeks of its current fiscal year.
This can't possibly surprise anyone. Big companies with the money typically use a lot of it to buy back their own stock. Target started buying back stock earlier this year, too, and U.S. Bancorp announced its latest stock repurchase program just before Christmas.
There's a lot of this going around. American companies authorized at least $500 billion of buybacks in just the first few months of the year, as tracked by the investment firm Goldman Sachs, a level of buyback activity no one has seen for at least two decades.
The reality of the pandemic recession is that most big companies escaped the worst of it. Big retailers kept their stores open and had the capital and capability to ramp up online sales. They either did fine or far better than just fine, like Target did, which set sales growth records. Most manufacturers did OK as well.
Federal regulators put limits on capital going out to shareholders of banks early last year, not knowing how badly the banks would be hurt by the pandemic recession.
U.S. Bancorp didn't perform as well last year as 2019, but it still reported earnings of $5 billion and generated a double-digit percentage return on average common equity. When the company announced it was going to start buying stock again in December, that news was tacked on at the bottom of a news release about having just been found by the regulators to be well-capitalized.
Critics of the practice of buying back stock must be annoyed. Only excessive CEO pay draws more complaints publicly. Sen. Elizabeth Warren of Massachusetts calls buying back stock nothing more than market manipulation to inflate executive pay.
She has a point about how the math works. Each share of repurchased stock boosts the proportion of future profits going to the remaining shareholders, which usually includes the CEO.
Somebody else is going to have to defend CEO pay, but corporate share buybacks never caused me much heartburn.
An editor last week asked why big companies won't instead raise wages, citing the well-known example of automotive entrepreneur Henry Ford doubling daily factory worker pay in 1914 to $5. One popular story is Ford wanted to boost consumer purchasing power including for his Model T's. Evidence suggests he was after higher productivity and workforce stability. His plan worked, too.
That's a convincing case of pay raises as a form of investment. But more often than not higher wages are just price increases.
Putting money into new factories, equipment or stores does qualify as an investment, of course. One problem is that a lot of businesses don't have much use for facilities or other big ticket items.
A case in point is the third-party logistics company C.H. Robinson of Eden Prairie. Last year it generated about $500 million in cash flow from operations while solving shipping and logistics problems for a global customer base during a chaotic year of bottlenecks and interruptions.
With all that cash flow, C.H. Robinson invested $23 million in property and equipment and about $31 million in software.
More than $200 million left the checkbook in the form of stockholder dividends and a smaller amount went for stock repurchases. But the biggest of these cash-line items was spending $233 million for acquisitions.
Buying other companies is a time-honored way to generate superior returns on shareholder capital — as well as a quick way to destroy value if bungled.
General Mills Inc. looks to be a recent winner by using acquisitions to grow, borrowing to pay for much of its $8 billion purchase of Blue Buffalo Pet Products three years ago. The company just announced another purchase, of the pet-treats business of Tyson Foods, to be paid for with cash in the bank and more borrowing.
These deals show that the managers are confident they can earn a better return investing in pet-foods businesses than by repurchasing shares in the market. What General Mills spent buying back its stock in the first nine months of its latest fiscal year rounds to zero.
A short response from JPMorgan Chase & Co. CEO Jamie Dimon to a question about acquisitions on the April quarterly conference call with investors nicely summarized current CEO thinking about what to do with surplus capital.
JPMorgan Chase has bought promising businesses, Dimon said, along with investing in or striking a partnership with maybe 100 additional companies. If anyone had any great acquisition ideas, he added, please let them know.
What JPMorgan Chase can't do, because it's so big already, is buy another U.S. bank.
"We're buying back stock because our cup runneth over," Dimon said.
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