|Posted by Ted Sehl on February 11, 2011 at 10:28 AM|
Here is the scenario: you are a public company with a sizeable cash balance and it is proposed to the Board that you re-purchase some of your shares, thereby giving the stock price a nice nudge forward. After all, your view is that you are there to maximize the shareholders wealth. A no brainer, right? I agree – you have not thought this through. I would suggest that you look at the following alternatives first:
1. Re-invest in your business. If your business is making good returns, why not re-invest and create more wealth for your shareholders and strengthen your position in the industry.
2. Accelerate your strategic plan. Even in businesses that are generating large cash flows, there are tough allocation decisions to be made. Ask yourself, if we could spend some money now to accelerate our strategic plan, would that give us an even greater market advantage?
3. Payoff debt. The companies that survived the recession were generally the one’s that had conservative balance sheets –is this the time to prepare for the next recession? Could you weather a double dip recession? As a former colleague often said, “I have never seen a company go bankrupt that had no debt”.
4. Leverage the supply chain. Do you have suppliers that have poor cash conversion cycles? If so, negotiate more flexible payment terms that allow you to pay early– you will be surprised at the size of discounts you are offered. And those discounts fall directly to the bottom line.
5. Look at acquisitions. Can this accelerate your expansion into a new market? Can you solidify your market position?
Your stock is valued by earnings multiples. Your choice is to either accelerate your earnings or reduce the amount of shares outstanding. If you choose the latter, what is it saying about your organizations’ view of the future? It would appear to me that a re-purchase may signal a lack of imagination and a management team that does not have an idea of how to expand their business.