Where Have All The Stock Buybacks Gone?

Given the magnitude of the stock markets decline, one would think that there would be major announcements from companies announcing stock buybacks.  I recall after the crash of 1987 when numerous companies announced major stock buyback programs in an attempt to inspire confidence and shore up stock prices.

As reported in Barrons this week,  stock buybacks declined by 90% from last year during the latest 10 day period, this despite the fact that the average stock has declined by around 50%.  So one may certainly be inclined to wonder why corporate America would be heavily buying back their own stock as the market was at all time highs but not now when, arguably, the stock is a better buy due to price declines.  Maybe some shareholder will ask this question of management at the next annual stockholders meeting.  Perhaps a better time to have asked about stock buybacks was when corporate management was spending hundreds of billions to buyback stock when times were good.

I have never been a fan of stock buybacks for these reasons:

– studies have shown that over time, share price performance of companies buying back stock does not exceed those of companies that do not repurchase shares.

-if management cannot intelligently invest funds back into their core business at a greater return than the cost of capital, then they should instead pay dividends to the shareholders, who will at least have something to show for their investment, since as stated above, stock buybacks do not lead to share price gains.   Microsoft was one of the few major corporations that actually paid a substantial dividend  to shareholders a few years back instead of repurchasing stock.

-unless a company is debt free, would it not have been better to have paid down debt instead of dissipating funds buying back stock?   As mentioned in a previous post, GE spent billions on stock buybacks at high prices and now has to borrow money at 10% rates.   I don’t see how this makes sense as a long term strategy.

-how many of the companies buying back stock have their long term compensation plans and bonuses tied to the EPS performance?  Quite a few I would imagine, which makes the decision to buy back stock all the easier since it directly increases management’s pay while the shareholders get nothing.  (Buying back stock decreases the outstanding shares used in computing the earnings per share, so a stock buyback will serve to increase the reported EPS.)

-how hard is it to conceive of the possibility that someday, markets will decline and cash will be dear, so why not pay down debt or simply increase your cash holdings to be used in an opportunistic manner at some point in the future?  Apparently, not too many members of corporate America ever thought about this or else we would now be hearing about a lot of stock buybacks and company buyouts.

-Exxon Mobil has spent billions buying back stock as their oil reserves shrink year after year.  With prices of oil and gas companies selling for a fraction of the price of a year ago, why are they not opportunistically reinvesting in their business by buying cheap oil and gas reserves via cash acquisitions?

-Merrill Lynch announcing a $6 billion stock buyback in 2006 – one for the history books of poor timing and inept management, although it may be topped by Merrill’s prospective owner, Bank of America, who despite needing taxpayers funds from the TARP, decides to invest $7 billion in the China Construction Bank.  I think BAC has a real problem here and the stock price reflects management’s decision making.  BAC’s
“investment” in China, GM executives flying on their plush corporate jet to Washington to beg for taxpayer funds – I think the pattern here is part of the reason for the economic crisis that we are in.

My conclusion is that a shareholder should carefully evaluate an investment in any company engaging in major stock repurchase plans.