Saturday, August 30, 2008

Stock Buybacks Again

I have written a couple times about the irrationality of stock buybacks from the standpoint of corporations using their money to manipulate stocks in expectation of higher bonuses. Today's Wall Street Journal offers another take on the subject. Besides providing a sense of the magnitude of stock buybacks, the article concentrates on the personal irrationality of corporate management, rather than the systemic irrationality of the capitalist system. In particular, the article suggests that corporations often squander money by purchasing stocks that turn out to be overpriced.

The article also offers examples of corporations purchasing unrelated corporations to make a quick buck, rather than developing their own productive capacities. My favorite example here was Exxon's entry into the typewriter business, suggesting that the management may be so inept that stock buybacks might not be so bad.

Zweig, Jason. 2008. "With Buybacks, Look Before You Leap: Repurchases Routinely Give Shares a Lift, But the Effect Could Be Ephemeral." Wall Street Journal (30 August): p. B 1

"Stocks regularly jump up 3% to 6% on the announcement of a buyback."
"Benjamin Graham pointed out a paradox: The better a company's executives are at managing its businesses, the worse they are likely to be at managing its cash."

"Three decades ago, with oil skyrocketing and profits gushing in, energy companies squandered billions of dollars on one bone-headed diversification after another. Mobil bought Montgomery Ward, the dying retailer. Arco acquired Anaconda Copper just before metal prices collapsed. Exxon even got the bright idea of manufacturing typewriters."

"So far in 2008, ConocoPhillips has spent $5 billion buying back stock; Chevron, $3.6 billion. From the end of 2004 through this June 30, says analyst Howard Silverblatt of Standard & Poor's, Exxon Mobil has soaked up an astounding $102.2 billion worth of its own shares."

"All told, the companies in the Standard & Poor's 500-stock index have bought back shares valued at more than a half-trillion dollars' worth of their shares in the past year."

"Every three months, Duke University economist John Graham surveys hundreds of chief financial officers. During the week of March 13, 2000, the absolute peak of the market bubble, 82% of finance chiefs said their shares were cheap, with only 3.4% saying their stock was "overvalued." More recently, buybacks hit their all-time quarterly high of $171.9 billion in September 2007, just before the Dow crested at 14000."

"Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share."

1 comment:

Myrtle Blackwood said...

I've been trying to figure what the real motivation for stock-buy-backs is. I doubt whether the true answer to this question will come from Murdoch's Wall Street Journal, however.

Here are a couple of interesting speculations:

"As we know CDS spreads are most immediately correlated with equity prices, so the best way to have them drop fast and a lot was to engineer a stock market rally, even if artificially. Ergo, the Bernanke Fed "surprised" markets on cue, as needed. "

Rocks, Hard Places and Pricing Models. Monday, September 24, 2007
Posted by Hellasious at Monday, September 24, 2007 5 comments Links to this post

The share buybacks are for the purpose of mopping up after the dilution caused by stock options.
If companies really wanted to return cash to shareholders, then they could pay or increase dividends.
Market Participant
By Market Participant, at 9:06 PM

I have to agree with Market Participant - this is a trick to hide the dilution effect of stock options, There has been little value gained through buy backs. Companies really have no choice to do it so that their shares remain priced higher.
By The Dividend Guy, at 11:20 PM
Sadly, both market participant and the dividend guy are right - particularly in info technology. One of the best examples of this is CSCO, which repurchases billions of dollars worth of shares, but all of this repurchase activity barely reduces shares outstanding because of the options. Whenever I look at a company, options available and awarded is one of the most important footnotes I examine. If the company is simultanously issuing options and repurchasing, I deduct the dollars spent to counteract dilution from net income. I like the chart, how would you change it to reflect the impact of dilution?
By Doug Pedersen, at 2:04 AM