Hewlett-Packard Company (HPQ), Weight Watchers International, Inc. (WTW), Alliance Data Systems Corporation (ADS): Don’t Be Fooled by These Destructive Buybacks

One company that did it right

Hewlett-Packard Company (NYSE:HPQ) and Weight Watchers International, Inc. (NYSE:WTW) destroyed value with their pricey share repurchases, but Alliance Data Systems Corporation (NYSE:ADS) created enormous value with its opportunistic buyback. The company spent nearly $900 million on repurchases in 2008 and another $400 million in 2009 when the stock traded at absurdly low multiples of normal earnings. Management eased off repurchases as the stock price recovered. Today, the stock trades at around $190 per share.

Alliance Data Systems Corporation (NYSE:ADS) is not a great business, but it’s a good one. It does not have the same earnings protection that a wide-moat company like Weight Watchers enjoys, but it arguably created more value for shareholders over the last five years than many companies of much higher quality. This is because management took the opportunity to invest cash on the balance sheet at a high rate of return in its current operations by repurchasing stock.

Bottom line

Share repurchases are neither universally good nor bad; it comes down to what the repurchase price is in relation to the value of the stock. Hewlett-Packard Company (NYSE:HPQ) and Weight Watchers repurchased shares at wildly overvalued prices, while Alliance Data Systems Corporation (NYSE:ADS) repurchased at absurdly low prices. The latter created enormous value for shareholders, while the former two destroyed value. Keep these companies’ respective capital allocation records in mind when deciding whether or not to buy them.

The article Don’t Be Fooled by These Destructive Buybacks originally appeared on Fool.com.

Ted Cooper has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Ted is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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