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Those stock buybacks are just another Wall Street scam
13-03-2015, 12:32 AM.
Post: #1
Those stock buybacks are just another Wall Street scam
Beware of corporations bearing shareholder gifts


Accordingly, many executives consider the buyback boom a no-brainer.

Do buybacks actually work?

Trouble is, stock buybacks are only a boon in theory. In practice, buybacks frequently don’t do much at all for shareholders, and there is little corporate accountants can do to change the state of the underlying business.

Here’s a fun list of underperforming blue-chips that spent a bundle on buybacks in 2014, to no avail:

Exxon Mobil XOM, +0.12% reported stock buybacks of $13.2 billion in 2014. But that couldn’t overcome weak energy prices, and shares tumbled 9% compared to an almost 12% gain for the S&P 500 SPX, +0.90% .

Tech titan International Business Machines IBM, +0.37% boasted in a chairman’s letter that it repurchased $13.7 billion in 2014.Too bad the stock dropped 12% on the year.

Machinery mega-cap Caterpillar CAT, +0.75% announced in its last 10-K filing that the company repurchased $4.2 billion worth of stock in 2014 — all for the stock to basically tread water, with a measly 1% gain on the calendar year.

Aviation giant Boeing BA, +0.52% spent $3.2 billion on buybacks in 2014, according to its latest 10-K filing, and still lost about 5% that year.

Restaurant icon McDonald’s MCD, +0.92% ) reported $3.2 billion in share repurchases, but the stock slid 3% on the year.

Telecom player AT&T T, +1.41% spent $1.6 billion in calendar 2014 to buy back stock, according to its financials, but shares declined about 4%.

Now, you can pooh-pooh these particular mega-caps as companies with their own specific problems. But that’s the point — massive buyback plans cannot change the fundamentals of a business, and turn a stock in a tough spot into a good investment.

On the flip side, do you really think Apple AAPL, +1.74% has gone up so dramatically because of buybacks? Any investor knows it’s about the prodcuts; the iPhone 6 launch and highly anticipated Apple Watch rollout are much bigger drivers of Apple stock.

Perhaps repurchasing stock lessens the pain during a rough patch, or creates a modest tailwind when times are good. But isn’t there anything better these companies could be doing with that cash, like R&D or acquisitions? Or why not issue a special shareholder dividend instead?

The bottom line is that buybacks don’t change anything substantive in a stock.

It’s important to be rational about how and why a company is buying back stock. Here are some questions to ask before you get giddy about a stock buyback:

What’s the alternative? Economists refer to the road not taken as the “opportunity cost” of a venture. If a company really has no other good options for its money, then a buyback may make sense. Except that raising a dividend would be a juicier alternative to many shareholders. Yes, acquisitions and R&D can be risky and amount to nothing. But the same is true for buybacks sometimes. Investors need to ask where else the money could be spent — even if management isn’t creative enough to ask it themselves.

Is the buyback affordable? It’s one thing for a cash-rich company with massive cash flows to earmark a few billion dollars for buybacks. But borrowing cash or bleeding the coffers just for repurchases can be a disturbing sign. In fact, GM’s announcement of a $5 billion stock buyback will “delay any potential consideration for an upgrade” to its credit rating, according to Moody’s. Hamstringing liquidity is not a wise way to run a business.

Do repurchases fuel stock awards? Another clever trick among Wall Street sharks is to buy back stock to maximize the value of stock awards to top executives. As options are exercised and more shares are doled out to company insiders, buybacks are a way to ensure those execs aren’t diluted by the issuance of extra shares. In fact, Apple CEO Tim Cook has been open about the company’s repurchase plans as a way to reduce dilution of employees who get compensated in Apple stock. While keeping employees happy and productive can have its benefits, shareholders need to ask if what’s good for staffers is necessarily good for them.

Are companies buying high? It’s worth noting that Apple initiated its buyback program at the end of 2012, with shares were trading for an adjusted price of $95 or so. The stock promptly dropped into the $50s over the next several months despite Apple buying billions worth of its own stock at elevated levels.

All this is not to say that stock buybacks are useless. In some circumstances a repurchase of stock makes sense, both for the company and for individual shareholders.

But it often appears that some S&P 500 corporations are committed to buying their own stock at elevated levels to enrich executives because they have no good ideas for growth.

Why pay a bigger dividend or develop a new product when you can buy back shares, ride the bull market, and blame the strong dollar on lagging performance?

Individual investors shouldn’t be duped by these tactics. You need to think seriously about whether buybacks are actually in shareholders’ best interest.

Now what do you think of our local coys buying back their shares rather paying you more dividends. Do you really benefit or someone else does?
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13-03-2015, 11:55 AM.
Post: #2
RE: Those stock buybacks are just another Wall Street scam
Stock buy-back is incrementally positive but you have to see what is mgt incentive to do that, which includes the majority shareholders' interest.

Management buying stock under their own account is much better indicator, and like I posted before, their spouse buying is possibly even better indicator, because he will have no end of it if stock tanks Smile

But we are not the only ones who know that. I think there is at least one PE privatised company relisted that mgt himself has been buying aggressively post IPO. I suspect mgt is supposed to be issued stock bonus, but the PE structure is such that cash was given and required to buy from market. So nett nett mgt holds the shares but effectively done the signalling.

So there are always exceptions, cause human ingenuity is exceptional Smile
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13-03-2015, 12:40 PM. (This post was last modified: 13-03-2015, 12:41 PM by Life is a game.)
Post: #3
RE: Those stock buybacks are just another Wall Street scam
I would like to add on that using shareholders money to perform stock buyback is positive only if the purchase price is above the intrinsic value of the shares. If the mgmt is using shareholders money to do stock repurchase at below intrinsic value then it is eroding shareholders value rather than improve shareholders value. Thus such action is a double edge sword.

The reverse is good for merger and acquisition though.
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13-03-2015, 01:01 PM. (This post was last modified: 13-03-2015, 01:06 PM by Big Toe.)
Post: #4
RE: Those stock buybacks are just another Wall Street scam
Stock buy backs are always good so long as the company is not over valued.
You cant fault a company doing buy backs and it should be encouraged when management thinks that business prospects are better than what the share prices are at the moment.

On the other end of the spectrum, we have companies that keep paying themselves high salaries/fees, issuing shares and diluting shareholder value.

The later is more common than the former, which would you rather have?

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13-03-2015, 01:49 PM.
Post: #5
RE: Those stock buybacks are just another Wall Street scam
I would rather have the mgmt grow the money and improve roe first. Secondly give out dividends. No choice then do share buyback.
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