Would $6 billion in cash have kept Sears out of bankruptcy?
It sure wouldn’t have hurt. Sears’ ability to stay in business is in doubt after the company filed for bankruptcy protection this month.
Yet Sears spent $6 billion buying back its own shares since 2005 in a futile effort to help support its stock price. The stock plunged more than 99% in value, from a high of $143.91 in 2007 to less than $1 a share a couple of weeks before its bankruptcy filing. In bankruptcy, the shares are essentially worthless.
“If they had put $6 billion into upgrading stores and website development, they could be in a very different position right now,” said William Lazonick, a retired University of Massachusetts economics professor and an expert in share repurchases. “They could be in a much better position to compete in the changing world of retail.”
Sears could have used the money to reduce its debt burden and provide the working capital needed to keep the company out of bankruptcy.
The company had more than $5 billion debt on the books at the time of the bankruptcy filing. Ahead of the filing, Sears chairman and primary shareholder Eddie Lampert had proposed a plan to sell assets and renegotiate debt down to $1.2 billion, which he argued was all Sears could afford.
Sears bought back about 21.7 million shares of its stock in 2007, when the company was still profitable. It paid $2.9 billion for those shares. But its stock started to decline as the sales and profits fell and the company’s problems became more apparent to investors. By the end of the year, Sears’ stock price had fallen more than 40% from its peak.
But Lampert and Sears doubled down on share repurchases, buying an additional 22.9 million shares for $1.5 billion, over the next three years as the company’s problems mounted. It repurchased a final 2.8 million shares for $183 million in 2011, as the company started losing money. It never returned to profitability, and its stock price never recovered.
The company declined to comment about its share repurchase record.
Stock buybacks are hugely popular – albeit controversial – tools that companies use to prop up their share prices. By having fewer shares outstanding, earnings per share (a key measure watched by investors) can rise even if the overall profits don’t increase.
Sears was hardly the only company purchasing shares over the past decade. Amazon (AMZN) bought shares, primarily to keep the number of shares outstanding level as it issued stock in the company as a form of employee compensation. General Electric (GE), another iconic company facing problems today, repurchased $24 billion in shares in 2016 and 2017 alone.
Critics say stock buybacks are a way for executives who depend upon stock and options as a major form of their compensation to boost their pay. But it’s rarely a good idea said Lazonick.
“They’re just a waste of money. They’re only going to give a temporary price bump,” he said. “For a company as troubled as Sears to be doing repurchases, it’s predictable it’s in the state it is now.”