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Tucked into all the good news released by Target Corp. when it announced yet another strong quarter last week was not much more than a line about the company renewing its share repurchase program.
The new authorization is for $15 billion worth of stock, and that's a lot even for a company as big as Target. It was puzzling to see, particularly for a company that seems to have a bigger growth opportunity ahead of it than it did a couple of years ago.
Besides, price always matters in business. Target's share price is off its all-time highs reached this summer, but it's still about double its peak before the COVID-19 pandemic.
Buying back shares ranks up there with overpaying the CEO as a corporate practice that aggravates people. But for some companies, it's better than just sitting on the cash and waiting for other opportunities to crop up.
Even the nonagenarians in charge of Berkshire Hathaway, who happily criticize any number of shortsighted business practices, support buying back stock — if the price is right.
Most corporations don't think "buy low and sell high" when it comes to dealing in their own shares. They are allocating capital, not day trading.
Target again this year said its top priorities for its capital were investing in the business, supporting the cash dividend and then buying back shares. That all sounds sensible until you realize that there aren't really any other reasonable uses for the company's cash, although the order here seems to be what matters a lot.
Buying back stock is not a new idea for Target, either. The company bought more than $2 billion worth of stock in 2018 and about $1.6 billion worth in 2019. Last year was odd because like a lot of companies Target suspended share repurchases for a while.
So far in the first half of the current fiscal year, the company has caught up from the pause last year, buying back more than $2.8 billion worth of stock.
That's a pretty good chunk of the cash flow of operations so far this year, of about $3.4 billion.
Target also spent about $1.3 billion on capital items, like store remodels and software, and this is where the conversation should get interesting inside the board room.
Customers can't always see where Target invests all its money. The investments that are obvious have certainly made Target a tougher competitor for other retailers, including its $550 million acquisition of Shipt in December 2017.
This deal was more like buying the broad capability to home deliver goods and groceries lickety-split than an acquisition of a business with customers.
Competitors haven't been standing still, either. The news last week that might've overshadowed Target's quarterly results was the report in the Wall Street Journal that Amazon.com is planning to open stores that will "operate akin to department stores."
Amazon declined to confirm this initiative, but given the Journal's record, it seems a safe bet that Amazon really is investing in some kind of store that might look a little like Target's.
Amazon, with more than $113 billion in revenue in its most recent quarter, still acts like the world's biggest startup. Its capital spending has only accelerated, nearly doubling to $26 billion for the first half of 2021.
The company has also had a stock buyback authorization in place since 2016 and has been generating plenty of cash flow from operations. But once again, Amazon announced a quarter in which it didn't buy back a single share of stock.
Target planned to spend about $4 billion this fiscal year, although management explained to its investors last week that a few projects have slipped into next year, and the total will be closer to $3.5 billion.
I spoke with a senior executive at Target and confirmed the basic outline of how it approaches capital allocation. And it's hard to argue with.
Projects are evaluated by the same yardstick, and it's whether the money that was invested in a project generates more return than what that money costs. This cost is more than the interest on borrowed money, too, because Target invests a lot of equity, and equity capital is far more expensive than debt.
When the company's managers say they are funding every initiative that makes sense, this is what they're talking about.
If an influential large shareholder or member of the board wants management to be "more aggressive," or move faster, they still aren't going to be able to influence the math. No management team will happily approve a capital project that its own staff concludes will destroy economic value.
In badly run companiesthat are under pressure to be more aggressive, you might see the managers going back to the top of the spreadsheet to tweak the assumptions until they get the right number on the bottom.
In that kind of company, particularly if it's got a chief executive with maybe only a couple of years until retirement, the trouble won't show up on the income statement right away. But the trouble will show up eventually.
You might think that a company that buys back stock rather than investing in riskier projects and acquisitions is engaged in short-term thinking, but in fact it's the reverse.
In 2017, the shares Target bought back came at an average price of $58.44. That looks kind of cheap now, with Target's stock trading around $250 per share.
The underlying assumption for the share repurchase program announced last week is that by being disciplined with its money now, in a few years Target can look back on stock bought back this summer at $250 and see another pretty savvy purchase.
