Standard & Poor's has studied the impact of stock buybacks and reached some pretty disconcerting findings. As stock buybacks have soared in popularity and become a favorite demand of activist investors, S&P found that they might not be so great after all.
As the company put it: "Conventional wisdom holds that (1) stock prices go up as a result of buybacks, (2) more buybacks are better than fewer buybacks, and (3) announced share buybacks actually reduce the number of outstanding shares significantly.
"Based on a study of buybacks conducted by S&P's Equity Research Services of the 18 months ended June 30, 2007, we believe that all three points were unsupported by the data during that period."
This may be true, but I'm still a fan of buybacks. When no compelling internal growth opportunities can be found, buying back stock is a lot better from a tax perspective than returning cash to shareholders the traditional way: dividends. Changes in the tax code could very well make buybacks obsolete.
One of the reasons for the declining performance of buybacks could be the motivation behind them. If they are done because the stock is undervalued and the company wants to return money to shareholders, that's great. But here's what Warren Buffett had to say about buybacks:
"Now, repurchases are all the rage, but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalized by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around."
The pattern of buybacks in the face of rampant insider selling at companies like Countrywide Financial (NYSE: CFC) would seem to be examples of corporate governance at its lowest ebb. At Countrywide it led to a lawsuit, with a pension fund saying that "defendants caused Countrywide to engage in unlawful business practices and to disseminate false and misleading statements to the public while simultaneously using more than $2 billion of Countrywide's assets to prop up the price of Countrywide stock via a share repurchase plan.''
But when conducted for noble reasons, buybacks can be the investor's best friend.
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Reader Comments (Page 1 of 1)
11-18-2007 @ 12:19AM
c8h8a8 said...
I find most buybacks unbeneficial due to the bloated amount of options granted to insiders. The buyback just compensates for options granted to indiders who letter exercise those options. Ironically the share count rarely drops year over year when a buyback is instituted.
A better way is to limit option grants to employers and actually buyback shares and throw some dividends to shareholders. the excess cash it best suited for holders, but not to increase awards to insiders based upon stock performance.
Granted there are exceptionl managers out there but these whole option awards grantes based upon performande reeks of accountabilty issues.
Back in the day you actually invested in corporations for their ability to restribute cash to shareholders. But know they award options only to repurchase stock to to make it seem the the float is going down but in most cases it never does.