Herbalife Ltd. (NYSE:HLF) has announced a deal to buy back $266 million worth of its own shares from Bank of America Corp (NYSE:BAC), following a previous decision to cancel dividends in favor of a more robust stock buyback program that was made public when the nutrition company filed its 1Q14 earnings.
Herbalife stock gets a boost from buyback deal
“Our strong financial position and the current market valuation of our shares make the repurchasing of our stock the most attractive use of our capital,” said Herbalife chairman and CEO Michael Johnson in a press release. “As we have long demonstrated, Herbalife is committed to enhancing shareholder value, which includes approximately $2.85 billion in total share repurchases since 2007.”
Under the agreement, Herbalife Ltd. (NYSE:HLF) will pay the money now with cash it has on hand and receive some of the shares up front, and the remainder when the program ends, probably before the end of the quarter. The exact number of shares will depend on the volume-weighted average when each portion of shares are transferred, and the repurchased shares will be retired.
Carl Icahn, who is heavily invested in Herbalife Ltd. (NYSE:HLF) and one of the companies most prominent supporters, has said that he supports the decision to eliminate dividends in favor of more buybacks, and considering his growing role at the company it wouldn’t be surprising if he were directly involved in the decision. News of the Bank of America Corp (NYSE:BAC) deal has pushed Herbalife shares up 1.23% so far in trading today.
Multiple reasons behind Herbalife buyback program
Buybacks are often a more tax efficient method of returning capital to shareholders than dividends, but the decision is probably also related to Bill Ackman’s ongoing short campaign against Herbalife Ltd. (NYSE:HLF). Right now Herbalife’s stock price is depressed because of the Federal Trade Commission probe into the company’s business practices, but if the FTC ultimately decides that there’s no problem (or requests minor changes and a small fine) the stock price should come back up, making increased buybacks look even better.
While it may not be the main motivation behind Herbalife Ltd.’s (NYSE:HLF) enhanced buyback program, reducing the number of shares outstanding (by about 4.5% if today’s price was used for the entire deal) puts more pressure on short sellers if the share price does start to rise again. Ackman has changed most of his short position to options after getting burnt in a short squeeze last summer, but the buybacks could persuade other short sellers who are along for the ride to move on.