Photo by Oxana Melis on Unsplash
 

Bed Bath & Beyond, once a stock market darling, is nearly bankrupt. Why?

Allan Sloan tells us: (Emphasis mine)

“We all know that the Bed Bath & Beyond (BBBY)…is in such big trouble that it’s likely to file for bankruptcy.

…. A major reason the company is so messed up is that when it comes to its own stock, the company violated a key rule of retailing – buy cheap.

…. Bed and Bath has spent more than $11.7 billion to buy back almost three quarters of its own stock, at an average cost about 15 times the stock’s current price. …. A couple of months ago, when it was already in desperate financial shape, it kept buying back its shares.”

Desperately trying to avoid bankruptcy, Wolf Street outlines its latest move:

“Shares of Bed Bath & Beyond,…spiked by…350% from a month ago, and then…gave up about half of that 350% gain in minutes after the company announced a desperate and ruthless proposal to sell a whole bunch of shares into this rally to raise over $1 billion, diluting the bejesus out of existing shareholders.”

A perfect bankruptcy scenario; use cheap money to buy 75% of your stock back at an all-time high, then, in a desperate move, issue new shares when the price is low.

Wolf Street concludes with this:

“Bed Bath & Beyond has been a meme stock queen for a while:…huge losses, collapsing sales, chaotic management, a ruined business model, and a bankruptcy filing hanging over it.

But it has a wild stock price, driven by the meme-stock crowd and a huge amount in short interest.

…. This is another reminder that the Fed…and all the other money-printer central banks need to remove many trillions of dollars…from the system…there is still a ridiculous amount of money floating around out there, and people are just throwing it around willy-nilly, with all kinds of side effects, including this nuttiness in the markets and the worst bout of inflation in 40 years.”

What a complete disaster! On January 27, 2021, BBBY closed at $52.89/share. Today it is around $1.50 and has not paid a dividend in the last 12 months.
 

Stock Buybacks

Stock buybacks must be good because companies spend trillions doing so. Reuters reports:

“Corporate stock buybacks are offering investors a measure of excitement in what has been a gloomy earnings season.

Companies have announced $173.5 billion worth of planned buybacks so far this year, just over double last year’s pace. ….

…. 2023 should be the first fiscal year with at least $1 trillion in completed S&P 500 company buybacks….”

Keith Fitz-Gerald jumps in, telling us:

“Share buybacks are on already track to double 2022’s pace….

Most investors and political types totally misunderstand the opportunity because they believe buybacks are a tactic CEOs use to manipulate share prices and starve companies of valuable investment capital.

In fact, share buybacks are great for savvy investors, especially when the companies doing ’em to pay dividends, too.

1. Buybacks boost EPS, which lowers the P/E ratio and, in turn, often attracts new money to the party.
2. Buybacks also lower the overall share supply and boost demand, which can be a powerful sign that management believes there are better days ahead, especially when share prices are low and putting in a floor (as is the case now).
3. And finally, the buyback yield can often be higher than dividends, particularly if you consider that they’re tax-friendly and often regarded as more flexible.”

Breitbart Business Digest chimes in:

“President Biden signed into law a surcharge on corporate stock buyback…(encouraging) business to invest in growth and productivity as opposed to paying out corporate executives or funneling preferred profits to foreign shareholders.

There are lots of half-formed arguments in that statement…. This is a strange argument because it implies that investors are wrong about their own interests, that they are rewarding companies for buying back shares when the money could be more profitably used to “invest in growth and productivity.”

Basic finance suggests this is not true. Stock prices reflect expectations of future earnings discounted for risk and time. A company that buys back stock at the expense of future earnings is likely to see its stock price decline.

Executives who oversee capital plans that push down share prices are likely to become ex-executives in short order, which is why they do not usually do this.

When companies buy back stock, it is usually because management believes the stock is undervalued or that they have already fully invested profits in things like R&D and have concluded that the best thing to do is return capital to shareholders.”

Baloney!!!!

I’m reminded of the Yogi Berra quote, “In theory, there is no difference between theory and practice. In practice there is!”

I contacted Chuck Butler for his reaction. In his usual straightforward style, he replied:

“I call B.S. on this statement: ‘Stock prices reflect expectations of future earnings discounted for risk and time.’ In today’s markets, stocks go up for no reason at all! Programmed trades, momentum and trader sentiment are the reasons stocks go up these days…PE ratios are outta sight and prices still continued to climb.

Remember Dennis, with real negative interest rates, investors had no place else to go….”

I feel governments shouldn’t meddle with the free market. If business owners want to buy back their shares in an open market, they should have a right to do so; for the right reasons.

As Breitbart says; falling share prices create ex-executives in short order; providing great motivation to use short-term thinking to increase share prices in any way possible.

When management says, “The stock price is undervalued,” be very wary.

In 2015 I shared a Zerohedge analysis concluding: (Emphasis mine)

“‘Virtually every single dollar raised through issuance of debt has been used for one thing – to buy back stock!‘

…. Several trillion in fungible debt had just one simple use – to boost stock prices, and to make management teams richer, while letting bondholders managing other people’s money foot the bill for record high management bonuses and stock prices.”

Cut the BS…. Since 2008 companies borrowed trillions in cheap money to buy back their stock at an all-time high – not because it was undervalued.

Executives, wanting to increase bonuses and keep their job, in a slow-growth world, gaming the system. Using trillions in borrowed money, Wall Street created the illusion of increasing profits. If you can’t increase profits, raise the EPS by reducing the share count. Stockholders went along with the charade.

If a company earns $2 million and there are 2 million shares of stock outstanding, it earned $1 per share (EPS). If they buy back 200,000 shares, 1.8 million shares are outstanding. Next year, if earnings dropped by 5% to $1.9 million, they would proudly announce their EPS increased by 5.5% to $1.055/share. Ca-ching! Bonus time…rewarding mediocrity.

You buy back stock when it is truly undervalued, not because money is cheap! A bad decision done cheaply is still a bad decision.

Likely Bed Bath & Beyond (BBBY) is only the beginning. Adam Levine-Weinberg tells us BBBY originally announced a $675 million share buyback, and then raised it to $1 billion: (emphasis mine)

“Bed Bath & Beyond appeared to have plenty of cash at the time. Even after funding the initial $225 million, the company had about $1.5 billion of cash on hand as of November 2020, compared to just $1.2 billion of debt.

…. Between these buybacks and the company’s accelerating cash burn, Bed Bath & Beyond used its entire $1.5 billion cash stockpile in just 18 months.

The company suffered a cash outflow of around $500 million last quarter alone, forcing it to tap its credit line for $200 million to keep paying the bills.

Plenty of companies have made questionable decisions to buy back stock over the years. Bed Bath & Beyond stands out because, in just 18 months, it sparked a self-inflicted cash crunch that could bring the whole company down.”

Yep, the cash is gone – vanished – and the debt remains….

Companies binge-borrowed and eventually that debt will come due. I went back to Chuck:

“Dennis, people don’t realize much of that borrowing was short term. What was borrowed at ridiculously low rates will soon have to be paid off or rolled over at much higher rates; particularly if their credit rating dropped. BBBY isn’t an isolated case; a slowing economy and higher rates will put a lot more companies in jeopardy.”

Corporate America, listen up!

Before buying back stock, pay off debt and fund your damn pensions properly. Stop the nonsense! Buying back stock may have been fun while the party lasted, but the effects of those short-sighted decisions are coming home to roost.

What does that mean for us?

The Fed must bring inflation under control; creating a recession. If not, inflation will skyrocket. Either way, business is going to suffer and investors will be scrambling.

Solid companies may not report record earnings, but they will survive and continue paying dividends. Seek out these companies that are not overburdened with debt and manage their cash wisely. Do your homework, there are still many well-managed companies to choose from.
 

On The Lighter Side

I grew up in the Midwest and find Arizona weather amazing. Last week much of the country was pasted with severe winter weather. The National Weather Service forecast predicted another blast was on the way.

We live just south of Black Canyon City. Our daytime temperatures were in the high 50s and at night we were in the 40s. Our home is 55 minutes from courthouse square in Prescott where they forecast 8-12″ of snow.

I tell our Chicago friends to imagine being in the middle of heavy winter weather, then driving less than 100 miles south and having mild weather.

Prescott is around 5000′ above sea level and Flagstaff is around 7000′. Both I-17 northbound and I-40 in Flagstaff were closed. I wouldn’t want to be on those mountainous, snow-packed roads with semis (drivers paid by the mile) trying to pass. It’s not unusual to be driving south on I-17 and having to dodge ice chunks flying off trucks coming from up north.

On the flip side, summer temperatures here in the valley can easily reach 120 and maybe cool down to 95 at night. Drive up the hill and the days may be warm, but the nights are much cooler.

Winter seems longer this year than normal. We talked about it at the cancer center last week and the locals fear we will go from cool weather to hot summer, missing most of the nice spring weather we normally enjoy.

Speaking of which, I got a clean bill of health, good to go for another three months…
 

Quote of the Week…

“I guess it is the simple things, but I never get tired of sitting out at night looking at the stars, contemplating the problems of the world and counting my blessings. Current problems be damned, we have much to be thankful for.”

— Dennis Miller

And Finally…

Friend Alex N. shares some clever thoughts for our enjoyment:

• All I’m saying is, at any point during that ride through the desert he could have given the horse a name.

• The most expensive vehicle to operate, by far, is the Costco shopping cart.

• Life’s short. Make sure you spend as much time as possible on the internet arguing with strangers about politics.

• One big difference between men and women is that if a woman says, “smell this”, it usually smells nice.

• I hate it when I mean to buy seedless grapes but instead I accidently get …. well, you know….Oreos.

• The older I get the tighter companies are putting the lids on jars.

• Why are hallways in psychiatric hospitals called “hallways?” Shouldn’t they be called psycho paths?

And my favorite:

• Folgers got it wrong. The best part of waking up is going back to bed after you pee.

More By This Author:

What’s Behind A Credit Score?
Eventually Has Finally Arrived
What Happened To Dependable Income, Safety & Predictability?