Asked for his best wisdom on investing, Will Rogers provided this timeless pearl of wisdom: "Buy good common stocks and hold them until they go up. If they don't go up, don't buy them."
That seems obvious, but when it comes to share buybacks, public companies appear to be doing precisely the opposite: buying back their stock like a four-year old who drank too much grape juice when times are good and then putting on the brakes when the market softens. When they really screw it up, they end up raising money at poor valuations after a buyback spree put the company's balance sheet in trouble when the economy took a turn for the worse.
The Wall Street Journal (subscription required) reports that "Share repurchases by components of the Standard & Poor's 500-stock index fell in the fourth quarter to lowest level since the third quarter of 2004, according to S&P, as companies sought to preserve cash as the market plunged."
Companies used low interest rates and loose credit to buy back their stock when the market was 50% higher than it is now. Now they're overleveraged, and they can't buy back stock now that it's actually cheap. Meanwhile, they royally screwed their existing shareholders by paying $40 per share for stock that is now worth $20.
So who are the real winners here? The savvy investors -- many of whom were corporate insiders -- who sold their stock into the buyouts and then stuffed in CDs or gold.
Does this make share buybacks bad? No: Share buybacks can be a great thing for shareholders when executed properly. Unfortunately corporate directors are no better at timing the market than monkeys.
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Reader Comments (Page 1 of 1)
3-30-2009 @ 1:07AM
Lone Ape said...
Good to know I'm not the lone ape out there. Never been and never will be.
Come to think of, is that necessarily a good thing to find out.