Stock buybacks not adding value like they used to

Posted Dec 17th 2007 9:20AM by Zac Bissonnette
Filed under: Management, Getting Started, Countrywide Financial (CFC)

I've written about share buybacks a fair amount in the past: whether insiders were using them to prop up share prices while they dumped, what role they have played in sustaining past bull markets, and whether they create long-term value for shareholders.

In Sunday's New York Times, Mark Hulbert wonders whether they're still good for investors. According to Hulbert:

S&P focused on those companies within the S&P 500 index that repurchased shares between the beginning of 2006 and June 30, 2007 - a total of 423 companies. It found that, as of Sept. 30 this year, 320 of them - or 76 percent - would have been better off had they not repurchased their shares and instead invested in an index fund benchmarked to the S&P 500.

There are a number of possible reasons for this: companies may be buying back their own plummeting stock in desperation as insider options fall farther and farther out of the money. For instance, Countrywide Financial (NYSE: CFC) actively repurchased stock, even as its CEO dumped huge numbers of shares and the company's prospects weakened.

Hulbert cites a fair amount of data -- including some interesting stuff about companies announcing buybacks to much investor rejoicing, but then failing to follow through by actually repurchasing large amounts of stock.

For investors, all the data probably isn't too important. Basically, you should never invest in a company just because it's buying back stock -- ever. Share buybacks can be a great way to return cash to shareholders when the the share price is undervalued and the company doesn't believe it can earn a better return by investing in the growth of the business. That's when share buybacks are good. Other than that, they're a bad deal for shareholders. As Warren Buffett has written:

"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."

Tags: Buybacks, CFC, Countrywide Financial, CountrywideFinancial, share buybacks, ShareBuybacks, stock buybacks, StockBuybacks

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Reader Comments (Page 1 of 1)

12-17-2007 @ 12:40PM

Zakia said...

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