Has Tiffany Been Wasting Your Money?

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Fellow Fool writer Alex Dumortier has an article series on share repurchase programs. In it he discusses recent company announcements of buyback programs and whether he believes they will be good or bad for investors. While investing is all about trying to predict the future, knowing the about the past performance can give you an edge on the competition.

Today we will see whether Tiffany's (NYS: TIF) recent share buybacks added or destroyed value for shareholders.

Past
Over the years, there have been a number of studies determining whether share buybacks are a good idea. One study shows that when stock repurchases are announced, the stock price will quickly increase by 3% to 4%. These announcements benefit short-term traders, but not those in it for the long run. There is good news for the latter group, though. Another study showed that when firms repurchase shares because the price reflects a true undervaluation in the market, the stock exhibits positive abnormal returns of 45% in the four years after the announcement. The problem is that too many CEOs use this as an excuse for repurchase plans even though the stock may not be truly undervalued.

When Tiffany was buying back shares in 2011, the stock's price-to-book value was at 3.6. That could be good or bad depending on the company's specific model, so let's see whether Tiffany created value for shareholders.

The company bought back 2.1 million shares at an average price of $65.97. The buyback essentially left the share count unchanged because of 2.09 million exercised options and restricted stock awards being handed out by the company. Basically, Tiffany spent another $138 million in payroll. The shares were also being repurchased at a higher price than they are currently trading for, effectively destroying $6.2 million.  

Future
Let's see how Tiffany stacks up against its competition in some key metrics and whether it is still a good time to get a piece of the action.

Company

Market Cap (in billions)

Current Price

Price / Earning

Price / Book Value

Tiffany$8.0$62.9918.33.5
Coach (NYS: COH) $19.83$68.3621.411.0
Ralph Lauren (NYS: RL) $13.65$150.6522.24.1
Michael Kors (NYS: KORS) $5.63$29.5356.7914.1
Liz Claiborne (NYS: LIZ) $0.89$9.42N/AN/A

Sources: Yahoo Finance! and Morningstar. N/A = not applicable; Liz Claiborne has negative earnings and a negative book value.

Both Tiffany and Ralph Lauren have concentrated sales in Europe, so the longer the financial crisis across the pond drags on, the worse things will get for these two companies. As of right now, Coach may be the safest bet in retail due to a structure shift in spending. Consumers are spending more on accessories and less on apparel. Since Coach's primary focus is accessories, it will see a nice bump in revenue over the next few years. The trend should also help Michael Kors, which currently has the highest P/E and P/BV, but these numbers are typical of a growth company. Kors has seen blistering revenue growth over the past few years and still plans to build another 400 stores in the U.S. alone.

Foolish take
Tiffany is also doing a good job at destroying value, and while it may look cheap, there is a good reason. For now I will keep looking for the shining stars that are adding value for shareholders. But you don't need to wait -- you can find out about a few companies that know how to treat shareholders right by checking out this free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks."

At the time this article was published

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