So, weird little bit of financial news today. There are a couple of moving parts, so let’s get those out of the way first.
- Last summer in July 2020, GE announced that intended to “fully monetized” its stake in Baker Hughes over the next three years. Fully monetize is lingo for sell.
- Earlier this year, GE said it sold $1 billion worth of Baker Hughes during the second quarter.
- GE also announced that it planned to sell another $1.3 billion worth of BKR during the third quarter.
That brings us up to date.
Baker Hughes announces a $2 billion stock repurchase program
In part, the idea behind the share buyback is that Baker Hughes is using some of the profits it has reaped recently thanks to a recovering economy and a carefully controlled quota by OPEC. Buying $2 billion worth of stock would essentially soak up the $2 billion that GE is selling right now.
In a world where supply and demand are the only factors that impact a stock’s price, GE’s selling would be pushing the price of BKR down.
You can kind of see that in the April to May dip in BKR. Assuming that BKR sold its final shares for the second quarter at the beginning of May, then the recovery there after is proof that GE’s sales of BKR are depressing the stock. Of course, GE also said it was selling in the third quarter, so maybe that slope in June to July is more GE selling.
Or maybe the stock just doesn’t look that profitable going forward with a recent OPEC deal to reign in prices, and the increasing possibility that the latest Covid variant may push some, or all of the recent economic gains back down for at least some countries.
Which is it?
It’s hard to tell, but is it really management’s responsibility to control the supply of its own stock? Isn’t the supply of its own stock the responsibility of its shareholders and investors. Theoretically, the company gets nothing out of having a lower number of shares on the market.
Aye, but there’s the rub.
Management gets plenty out of a news story that says it is defending Baker Hughes stock. It gets even more out of its forth coming numbers looking better not because the company is performing better, but because there are less shares outstanding.
I am not a fan of share buybacks. If a company has more money, real money, the give it back AS CASH to shareholders, instead of as an accounting gimmick.
Is Baker Hughes Stock a Good Investment
Oil companies are tricky investments because so much of their fortunes are out of their control. OPEC, and its cheaters, and off the books pumping, determine the price of oil. Baker Hughes depends on the price of oil. No matter how great management is, or how hard its employees work, it doesn’t matter. The future of the company and its stock price depends almost entirely on oil.
That being said, energy stocks, and oil stocks in particular can offer some sweet dividends.
Right now BKR has an 18 cents per share dividend that works out to a 3.43% annual yield, and that’s AFTER a recent run-up.
As always, I like my stocks to pay me to invest in them. Baker Hughes certainly checks that box, but so do lots of other oil companies, many with the same advantages and draw backs. Before you jump into BKR, you might want to take a look at the 4%+ dividend currently coming out of Marathon Petroleum (MPC).
If you are missing energy stocks in your portfolio, BKR might be a solid option. It would have been even better if it hadn’t bothered with this gimmicky share buyback.
By Brian Nelson – Brian is a former Certified Financial Planner and financial advisor. He writes for the Finance Gourmet and other financial publications. The material provided on this website is for informational use only and is not intended for financial or investment advice. At the time of publication, Mr. Nelson did not own any securities mentioned above, however, that may change at any time without notice. ArcticLlama, LLC, FinanceGourmet.com, and Brian Nelson, assume no liability for any loss or damage resulting from one’s reliance on the material provided. Please also note that such material is not updated regularly and that some of the information may not therefore be current. Consult with your own financial professional when making decisions regarding your financial or investment options.