Tuesday, February 16, 2010

Dollar-cost averaging at Sara Lee (SLE)

Sara Lee announced an hour ago that they've had an abrupt change of heart in the capital allocation strategy, and are betting the farm on stock buybacks.
“Two weeks ago we reported strong first half results, which allowed us to increase our guidance for the second time this fiscal year, and at the same time accelerate second half investment in growth opportunities. In addition to our strong operating performance, the capital plans and targets set out today are designed to drive significant shareholder value,” said Sara Lee Corp. chairman and chief executive officer Brenda C. Barnes. “With the H&BC sale process well under way, we have good visibility on the proceeds, and expect to begin receiving them soon. At this time, we firmly believe that the best use of these funds is to buy back Sara Lee shares, which will be accretive to earnings per share. While maintaining a solid investment grade credit profile, we estimate that we can buy back around $2.5 to $3 billion of stock over a three-year period. The plan is to front-load the repurchases, initially buying approximately $1 to $1.3 billion of shares by the end of this calendar year. We are committed to driving strong growth in future years, and combined with aggressive share repurchase, we anticipate significant improvement in earnings per share.”

By my calculations, they've repurchased shares at an average price of $17 over the past 24 quarters, which would be a 35% loss on their stockpicking. They were very interested in repurchases near $20, and much less so last year in the single digits. No one should be surprised here, as management is not in the stock picking business. By announcing a huge new buyback program - heavily front-loaded - they're trying to "average down" in their stock repurchase price.

Companies with big cash flows can do several things with those cash flows:

-Re-invest in their business
-Acquire other businesses.
-Pay out $$$ to shareholders via dividends.
-Repurchase shares.

To be fair to Sara Lee, they pay a handsome 3% dividend yield with an announced target of 40-50% payout as a percentage of net income. But their past repurchases have destroyed shareholder value. At least this time their doubling down with the shares at attractive prices, but why no boost the dividend? Are they too embarrassed to pay a higher dividend?

Buying back SLE stock at today's approximately 8.4% Free Cash Flow Yield makes sense only if they can't find a higher return on that money by investing it back in the business or using it for an acquisition. At the VERY least, they might have boosted their dividend along with this huge increase in the buyback program. I would suspect that ValueAct Capital and Pzena Investment Management, activist investors who own about 7% of the company, pushed for this buyback program.

Taken as a whole, this accelerated repurchase program is probably at a decent price. But the company's history of buybacks at higher prices show why management should focus of profits, rather than excess cash "allocation." Just give it back through dividends, guys/(gals)...



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