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BEHIND THE NEWS: Buybacks come back to haunt WellPoint

March 24, 2008

For most of Indianapolis-based WellPoint Inc.'s six years as a public company, it's been a Wall Street darling.

Even with the company's stock down by nearly half since January, it still boasts sterling long-term performance. Since their October 2001 debut, the shares have appreciated 120 percent, obliterating the 18-percent advance of the S&P 500.

But that's yesterday's news. Management has been on the hot seat since March 10, when the company announced it was slashing its earnings forecast because medical claims were running higher than expected. The announcement whacked 28 percent off the stock price in a single day.

It's not just that management failed to correctly forecast the future. It's that this year's falling stock price-which chopped $23 billion off the company's market value-made some past decisions look misguided, too.

A case in point: WellPoint's aggressive stock buyback strategy. Often, scooping up shares of your own stock can be a great way to build shareholder value. Doing so reduces the number of shares outstanding, giving holders of the remaining stock a bigger slice of the ownership pie.

But the strategy unravels if companies pay what prove to be inflated prices. That's what happened at Well-Point, which spent a whopping $6.2 billion on buybacks last year, paying an average of $79.99 per share-75 percent higher than the stock now trades.

In a new report, the research firm Gimme Credit put WellPoint in its "stock buyback Hall of Shame" for the 2007 purchases and another $1.2 billion in purchases this year at an average price of $80 a share.

"After witnessing the turmoil in the bank and finance sector in recent months, we hate to see yet another example of a company blithely spending its 'excess' capital, only to find that it would have been nice to husband some of those resources for a rainy day," Gimme Credit analyst Kathleen Shanley said in a report.

In a separate research note, she wrote, "WellPoint isn't in the emergency room yet, but the decision to buy back [so much stock] reduced financial flexibility."

Indeed, after WellPoint reduced profit expectations, Chicago-based Fitch Ratings scaled back the company's outlook from stable to negative. It said the company still has "excellent debt coverage ratios," but less margin for error.

WellPoint spokesman Jim Kappel said that, even though the company scaled back earnings guidance, "there will still be very strong cash flow generated during the year. ... We will continue to effectively manage our capital."

WellPoint is far from the first Hoosier company to demonstrate bad timing with a buyback program. In hindsight, its Monument Circle neighbor Emmis Communications Corp. wildly overpaid in 2005 when it bought back 20.2 million shares for $395 million, or an average of $19.50 apiece.

Factoring in a $4-per-share cash dividend Emmis handed out in late 2006, that's the equivalent of $15.50-a buyback price that's five times higher than where the stock now trades.

The stumbles shouldn't come as a surprise. Corporate boards are susceptible to the same emotional swings that vex individual investors, causing them to sell low and buy high.

Companies tend to spend most freely on buybacks during heady times, when coffers are awash in cash. They cut back when times turn tough-even though that's when stocks tend to trade for bargain prices.

Throgmartin snaps up shares

HHGregg Inc. CEO Jerry Throgmartin this month spent $1.4 million to purchase shares in his company on the open market-making a bullish statement about the Indianapolis-based chain at a time the retail sector is slumping.

Throgmartin acquired 170,500 shares for an average of $9.87-well below the company's July 2007 IPO price of $13 a share.

"I think the growth potential is very good," Throgmartin explained at a March 12 investment conference in New York City.

He said the company has a wealth of opportunities to expand because it differentiates itself from rivals by using highly trained, commissioned salespeople.

"I believe in my heart of hearts that the consumer is absolutely ready and waiting for an alternative in the way that they shop," he said.

Smulyan back to full salary

Emmis CEO Jeff Smulyan worked for just $1 in salary last fiscal year-a show of unity with the company's battered shareholders. But a new regulatory filing shows the company restored his full salary in the fiscal year that began March 1.

This year's salary will be $905,000. That compares with $880,000 in the year before he worked for $1.

Emmis spokeswoman Kate Snedeker said in an e-mail: "We believe our situation is improving, and the board's compensation committee believes his salary is fair given the effort and work he puts into the company he founded."
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