If you want to take a peek at how to destroy a balance sheet for the sake of propping up your stock price, look no further than Dun & Bradstreet
(NYSE:DNB). The quarterly results were as ugly as I expected
. In the face of a predictably withering business, the company is wasting its money buying back its stock near all-time highs. While its Q4 full balance sheet was not included in the press release, its long-term debt jumped $270 million, presumably from utilizing its revolver.
I'm not doctrinally against using debt to buy back stock (although I recognize that broad wisdom suggests it is not a good idea), but I find it a reckless exercise when it reduces a company to carrying almost $1.3 billion in debt vs. $149 million in cash, and some $1.25 billion in pension obligations to boot. And I certainly wouldn’t describe the buybacks and the dividend as “rewarding” shareholders for their patience, as the CEO put it on the call. When a company buys back stock and/or issues dividends in excess of what it makes, it is called a “return of capital,” not a “reward.” And when borrowed money is repeatedly used for that, it is called a dumb idea. Anyway, that's clearly not how DNB management sees it, since they plan to continue bidding for their stock while guiding to a decline in operating income of 3-6% for 2013.
The question, of course, is, where the money for the remaining $400 million+ in buybacks come from. The company is guiding free cash flow to $270 million to $300 million for the year, or just about what it spent for buybacks in Q4 alone
. That leaves the company its receivables, the balance of the revolver (approximately $220 million), and any additional debt it can pile on top of the existing mountain.
Finally, an observation on how DNB plans to get itself out of the current tailspin: Based on the comments on the call, DNB recognizes that competitors are coming at it aggressively on price, so it plans to differentiate itself based on "value" or --as the company describes it -- by doing analytics on the data. From what I've seen of DNB's reports, what the company calls "analytics" is little more than nice packaging with a few graphs. The crux of DNB’s problem is that the company is not selling just a commodity (information), but a commodity whose price gets closer and closer to zero courtesy of the worldwide Web. Either DNB can find something else to sell, or this company is in deep, deep trouble.
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Position in DNB.
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