HPQ: We Predicted It But …
Last week, on credittrends.com , I wrote:
Whether HPQ is successful or not in its bid, one would expect the Board to increase the $4.4 billion remaining authorization in its share repurchase program, both in an attempt to appease analysts and investors who have been critical of the firm as well as present a united and undaunted front to investors and customers of a Board having strength and conviction while potential new CEOs are being interviewed.
I do not agree with today’s announced additional $10 billion share repurchase as it does not add value to existing shareholders.
A much preferable course of action would have been to invest in additional free cash flow generating projects and investments, which at the same time, would have lowered the firm’s cost of capital, as it diversified away from the cyclical-cash flow PC business. The Board should have recalled how it placed itself in a strong cash position, which of course was led by shrewd acquisitions and cost cutting.
While today’s announcement might make investors short-term happy, as we have seen and proven, depleting a significant equity cushion without a commensurate rise in prospective free cash flow (and spread between cash- based return on invested capital (ROIC) and cost of capital) long-term prospects of the enterprise are compromised.
Also see our important article of last week, “Strategic Decisions Must Have Quantitative Backing For Success”.
Related articles:
- 3PAR bidding war: Are Dell and HP crazy
- Hewlett-Packard (HPQ) Fair Value Estimate
- Comment on HPQ
- HPQ, Business Acquisitions, and Share Buybacks
Disclosure: No positions
Kenneth S. Hackel, CFA
President
CT Capital LLC
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