Cleveland Cliffs Inc (CLF)

[Rocky3]

Barron's thinks that it is robbing Peter to pay Paul:

https://www.barrons.com/articles/3m-cleveland-cliffs-buyback-dividends-c646c1d3?siteid=yhoof2

In part:

Investors typically cheer large capital returns, whether they be buybacks or dividends. The problem is that Wall Street projects a 2024 free cash flow for the company of about $530 million, and $770 million for 2025—and those numbers don’t support its buybacks.

To make up the difference, Cleveland-Cliffs—whose bid to buy United States Steel was spurned —will take on more debt. “We are implementing a more shareholder-friendly leverage target of 2.5 times net debt to last 12 months adjusted Ebitda, allowing ourselves even more flexibility for aggressive shareholder returns,” Chief Financial Officer Celso Goncalves said on Tuesday. (Ebitda is short for earnings before interest, taxes, depreciation, and amortization.)

Net debt to Ebitda is a common measure of balance sheet strength. Cliffs’ ratio at the end of the first quarter was about 2.3 times. Dividend payers in the S&P 500 index have an average ratio of about 1.9 times.

“We are surprised [by] the scale of the buybacks, having (incorrectly) assumed that balance sheet flexibility would be the No. 1 priority until the M&A backdrop was fully resolved,” Citigroup analyst Alexander Hacking wrote.

The postearnings stock drop wiped out about $1 billion in market value from Cleveland-Cliffs. That is very close to the debt needed to fund the new buyback.

Capital return to shareholders is great, but investors don’t like robbing Peter to pay Paul.