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Disgusting Buybacks

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April 09, 2008 – Comments (11)

The WSJ blog tallies the buybacks for 2007 and financial stocks were at the top of the list for buybacks.

I simply do not see how buying back shares well into a bull run does anything for investors.  

"Last year, S&P 500 companies repurchased a record $589 billion of their own shares, up 36% from 2006 and more than quadruple the level of 2003, according to Standard & Poor’s. Financials had the biggest plate at the table, accounting for 20% of all buybacks in 2007."

 So, how much private equity have financial institutions had to raise lately?  They did share buybacks of $118 billion at the top of the bull run and now many of them are raising equity at about 20% of the price...

Overall, companies are down 25% on the year so these buy backs have likely been a disaster for investors, and essentially rewarded those who sold.

How do these guys get away with this?

"It’s a dramatic turnabout. As recently as January, Lehman authorized a 100 million share buyback plan. Now, such grand plans look like something for the history books."

11 Comments – Post Your Own

#1) On April 09, 2008 at 6:36 PM, dwot (46.92) wrote:

This one is a micro perspect of the margin squeeze in action.

I think this kind of thing will be happening market wide and that is why the S&P is so over valued. 

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#2) On April 09, 2008 at 6:53 PM, dwot (46.92) wrote:

 Some quotes just make you laugh...

"My apologies for lumping in the Realtor's group with drug abusers. In doing so, I meant no insult to the crackheads of the world..."

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#3) On April 09, 2008 at 6:55 PM, dwot (46.92) wrote:

 

Who will bail out the fed

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#4) On April 09, 2008 at 8:59 PM, nuf2bdangrus (< 20) wrote:

Just shows stock buybacks are a good short signal

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#5) On April 09, 2008 at 9:00 PM, alstry (36.24) wrote:

Excellent observation.  Legislation should be passed that no corporate exectutive or board member can sell any shares during any period where he/she contributed to the authoriztion of a stock buyback.

Have you totalled up how much money the top five Private Equity/Hedge Funds have spent in the past year.  It seems to exceed the total dollar value of the top twenty equity mutual funds.  Quite frankly, I doubt that these funds internally raised these kinds of dollars. 

Any thoughts?

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#6) On April 09, 2008 at 11:56 PM, wm052 (32.65) wrote:

Corporate insiders don't need a buyback program to make tons of money when they sell. If you're a lucky fat-cat - you simply exercise the options and take the cash - only downside is the tax rate - alternatively watch the option exercisers when the insiders actually hold onto the majority of their exercised shares - that's bullish I think. W

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#7) On April 10, 2008 at 12:20 AM, AnomaLee (28.73) wrote:

Company A:

    Issues $20 million share buyback
    Issues $35 million in stock options executed at $0 per share.

I really liked 'Who Will Bail Out The FED'

That was a very good post. Anyone who prefers share buybacks as opposed to a dividend payout is foolish.

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#8) On April 10, 2008 at 6:30 AM, TMFDeej (99.29) wrote:

Good post, dwot.  I was just thinking this about buybacks yesterday.  Everyonoe sees them as such a great thing, but I personally am not a big fan of them.  When I buy companies, I want them to be able to be sucessful enough that they can make a good return on investment by sticking any profits that they have back in their operations.  Make your company stronger rather than just taking the easy way out and say "oh well, I guess that we'll just buy back more stock." 

XOM is the epitome of this.  They never do anything with their cash other than buy back slugs of stock.  That's why, even though I am very bullish on oil and gas I will never own stock in this company. 

If a company is in a mature business and they absolutely cannot find any place to invest their profits that will provide them with an adequate rate of return, just give the money back to the owners aka sharehomders in the form of a dividend and let them decide what to do with it.  I'll gladly worry about the tax hit. 

I can't tell you how many companies I have seen buy back their stock this year only to have their share price cut in half afterwords, SCSS, FMD, FCFS, etc...yuck what a terrible waste of funds.

Deej 

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#9) On April 11, 2008 at 9:01 PM, dwot (46.92) wrote:

 Agreed nuf2bdangrus

Alstry, I am thinking more and more options should be outlawed.  The exact bonus should be outlined and paid from earnings and the bonus should probably also be averaged over 5 year performance.

wm052, the buybacks see to push price higher, so more to gain from options. 

 AnomaLee, agreed. buybacks are increasingly to just cover the options issues. 

TFMDeej, I hate buybacks. 

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#10) On April 30, 2008 at 8:35 PM, wolfhounds (29.30) wrote:

Having worked at MMC when it was a major financial company, it was policy to buy back enough shares to cover options each year regardless of price to protect dilution. It would be interesting to see if  the timing of those Financial buybacks occurred before the storm.

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#11) On May 06, 2008 at 10:48 PM, motleyanimal (79.87) wrote:

Buybacks create the illusion that the company executives actually care about the shareholder.

The reality is that they lack the imagination and planning to create new products and enterprises even when they have the capital to do so.

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