PayPal’s buyback history was “very bad.” Can a new CFO change that?

PayPal Holdings Inc. cheered investors when it announced a new $15 billion buyback authorization earlier this week, among a number of other shareholder-friendly moves. Now investors have to hope that the company performs better than it has in the past with its new buyback plan.

While the e-commerce giant has been buying back shares for years, its buyback history has been “very poor,” according to VerityData research lead Ben Silverman, who tracks buyback patterns and insider sales data. The company has repurchased $8.7 billion of stock since 2019 at an average price of $143.21. This is comparable to PayPal’s PYPL,
Wednesday close at $97.92.

Additionally, the company has reduced the number of outstanding shares by only about 1.4% over the past three and a half years, he noted.

Those buybacks “clearly didn’t support the stock for very long, if they played a role in that, and they weren’t a good return on investment,” Silverman told MarketWatch.

PayPal still had about $2.8 billion on its previous buyback authorization as of June 30, but the company’s decision to add another $15 billion to the program signals that it still views buybacks as a priority. Although PayPal executives have said their various shareholder initiatives were underway before activists from Elliott Management invested in the company, Elliott has been known in the past to urge other companies to buy back shares.

One factor that could potentially work in PayPal’s favor as it begins its next chapter of share buybacks is that it will have a new chief financial officer at the helm, following the former Electronic Arts Inc. EA.
CFO Blake Jorgensen took over the position on Wednesday. As boards approve stock buybacks, “the CFO plays a big role in deciding when to deploy that capital,” VerityData’s Silverman said.

He noted some potentially promising signs from Jorgensen’s early history at EA. When Jorgensen joined the company in 2012, “the stock was doing really bad and it was just being pressured,” Silverman explained. Then, in the following two quarters, when EA stock was “in the ditch,” the company became “very aggressive with its buybacks.” When the stock started to climb in 2013, EA “curbed” its buybacks.

While Silverman said that EA became more formulaic with its buybacks around 2014, he commented that Jorgensen still “has a history of opportunistic use.”

PayPal executives said Wednesday they are targeting about $4 billion in buybacks for the year, which would account for about 3.6% of the company’s current market cap of about $110.2 billion.

Because the company repurchased about $2.25 billion of stock in the first two quarters of the year, the company’s target implies a slowdown in the second half, Silverman pointed out.

In any case, investors should hope that PayPal will better time its buybacks in the second half of the year than it did in the first. The company repurchased $1.5 billion of stock at an average price of $133.69 in the first quarter, according to Silverman, while it bought back $750 million of stock at an average price of 98.00 in the second quarter $.66 repurchased.

“You want to see the opposite,” he said, noting that PayPal’s management team became less aggressive with buybacks as the stock price continued to fall.

When evaluating the effectiveness of a buyback program, investors should consider whether a company was able to fetch a good price and whether it was effectively reducing the number of shares outstanding. Reducing the number of shares can increase earnings per share by lowering the denominator in this equation.

If a company plans to spend $4 billion a year on buybacks, like PayPal is, “you want to put that in at a lower price point,” because then the company could have a bigger impact with the money it’s spending have a number of shares, said Silbermann.

“When investors look at buyback announcements, they need to look at a company’s history and understand what buybacks actually do,” he added.

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Although the buybacks could serve as a “psychological” bonus in PayPal’s case, Silverman expects the real catalyst for PayPal’s stock to be operational performance.

After a rough start to the year, PayPal executives are attempting to contain costs while refocusing on the company’s core strengths, including the checkout process. With shares about two-thirds off their July 2021 closing high, the company still has a long way to go in its recovery, but many analysts seemed to think PayPal was on a better path following its latest earnings report.

Now it’s up to the company to execute — both in terms of when to buy back and how to turn the business around. PayPal’s buyback history was “very bad.” Can a new CFO change that?

Brian Lowry

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