Good news, but not for the stock. The stock buybacks emptied Starbucks. The SEC should again convict them of illegal market manipulation, as it had done until 1982.
By Wolf Richter for WOLF STREET.
On his first day as the new interim CEO of Starbucks, which made headlines for a series of successful union votes by frustrated employees, Howard Schultz told employees in a letter this morning that the company would put end to its share buyback program. “This decision will allow us to invest more profits in our employees and our stores – the only way to create long-term value for our stakeholders,” he wrote on his first day back at work. .
This follows a massive share buyback spree launched in October by now-deceased CEO Kevin Johnson, who had held the position since 2017. In October, the company announced it would pay $20 billion in buybacks shares and dividends.
It quickly blew, wasted and incinerated $3.5 billion in cash when buying back its own stock in the fourth quarter, according to its 10-Q filing. Since 2005, Starbucks has blown, wasted and incinerated $30.8 billion in stock buybacks, the most ($22 billion) since 2017 under Kevin Johnson (data via YCharts).
Along with the buybacks, the company has also hidden the dilutive effects of shares issued to executives and others as part of the company’s stock-based compensation plans.
Distributing part of its profits to its shareholders in the form of dividends is what a company is supposed to do. In the fourth quarter, Starbucks paid out $576 million in dividends, and that was plenty, considering it only had net income of $816 million. But okay.
But that was on top of the $3.5 billion it squandered, wasted and incinerated in fourth-quarter stock buybacks. Share buybacks were used to support the share price, given the weak performance of the company’s operations. These share buybacks were financed with borrowed money.
Over the years, these share buybacks, financed at least in part by borrowed money, have left the company with more liabilities than assets: in the fourth quarter, the company’s negative equity are compounded to $8.5 billion (“shareholder deficit,” as the company calls it). . Share buybacks financially drained the company.
Stock buybacks were considered illegal market manipulation until 1982, when the SEC issued Rule 10b-18 which provided companies with a “safe harbor” to buy back their own stock. And since then, corporations have blown, wasted and incinerated huge, bloated sums of cash – often borrowed – for the sole purpose of manipulating their stock prices.
Think of how much Starbucks could have done since 2017 with the $22 billion in cash it blew, wasted and incinerated in stock buybacks. Two of the things he could have done were highlighted by new CEO Schultz today: taking better care of his employees and his stores.
“We all have a stake in our future,” Schultz wrote in the letter. “It serves as an invitation to come and build it.”
Starbucks faces a host of major issues. There is widespread employee discontent which has led to successful union votes at nine of its stores. Another 180 company-owned stores have filed petitions for union elections. It comes amid general labor shortages that have made workers aware of their newly acquired powers, and they want better pay and working conditions. The company also faces significant increases in the costs of the products and services it purchases. Dealing with these pressures is going to cost real money.
Starbucks should never have incinerated the $30.8 billion in cash on stock buybacks. And the $22 billion incineration since 2017 has weakened it, now that it faces these operational pressures. And ending these stock buybacks is good for the company, and a new focus on employees and stores will also be good for the company.
And it would be good for the SEC to once again declare that stock buybacks are illegal market manipulation.
But ending stock buybacks may not be good for the stock price. Starbucks [SBUX] is down 4.7% so far, and down 31% from the July high of last year.
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