Big Buyback Bolsters Best Buy

Shares jump after the retailer sets plans to repurchase a quarter of its stock and hike its dividend.
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Updated from 8:26 a.m. EDT

Best Buy

(BBY) - Get Report

announced plans for a $5.5 billion stock buyback, an increase in its dividend and a big boost to its store expansion targets, indicating that the consumer electronics giant still wants to grow as it continues to mature.

The news sent the retailer's shares up $2.11, or 4.7%, to $47.10 in recent trading.

Following in the tracks of

Home Depot

(HD) - Get Report

, which last week announced a

$22.5 billion buyback program, Best Buy said it intends to repurchase $3 billion of common stock no later than February 2008. The remaining $2.5 billion is subject to business results, market conditions and board approval, the company said.

Best Buy currently has a market capitalization of roughly $21.3 billion, meaning a $5.5 billion buyback could cut its shares outstanding by one-fourth. The company has about 473.9 million shares outstanding.

In another effort to drive shareholder value, Best Buy said it will increase its quarterly dividend to 13 cents a share from 10 cents.

"Our 41 years of proven success, our strong balance sheet and our belief in our employees afford us the opportunity to fund multiple avenues of value creation at once," said Brad Anderson, the company's vice chairman and chief executive, in a statement.

The news comes a little over a week after the Minneapolis-based retailer posted

disappointing earnings for its first quarter. Best Buy's profit unexpectedly slid 18% in the period as the company's sales mix shifted toward lower-margin products.

Rick Weinhart, an analyst for BMO Capital Markets, said the consumer electronics industry as a whole is going through some weakness, but Best Buy's decision to expand while some of its competitors shutter stores is a testament to the company's strength.

"This company is never 'business as usual,'" Weinhart says. "It's constantly pushing the envelope."

Best Buy's plans for an increased store count could bring its total in the U.S. and Canada to about 1,800, up from a prior plan of 1,400 stores. That would be about double the company's current store count of 854 U.S. Best Buy stores and 47 Canada stores.

The company didn't give a timetable for its expansion, but noted that on average, the company has historically increased North American square footage by about 10% annually.

David Strasser, an analyst for Banc of America Securities, wrote in a research note that Best Buy's buyback program and store expansion is an acknowledgement of its position in the business cycle. Like many big box retailers, Best Buy is expected to open new stores with a smaller footprint.

"This is a sign they are accepting their maturation as a retailer and will not just grow for growth sake, but will be more selective with higher hurdle rates on new projects," Strasser wrote.