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USA Inc.: Another Historic Misallocation



February 23, 2011 – Comments (7) | RELATED TICKERS: GS , BRK-B , VLO

Share buybacks are ramping up -- now that the market has doubled off its low. You can follow me on Twitter.

Alex Dumortier

7 Comments – Post Your Own

#1) On February 23, 2011 at 9:18 PM, Varchild2008 (85.34) wrote:

I don't get it.... These companies put out all of these shares for us investors to purchase and just when we deposit some cash to make the purchase, the companies turn-a-round and buy back their that we can not buy the stock.

Remind me again why it is a good thing for a company to have less stock for investors to buy?

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#2) On February 23, 2011 at 11:50 PM, checklist34 (99.06) wrote:

reduced share count = higher earnings per share and fewer people to share those earnings with which=, in theory, a higher share price.

in theory the effect is the same as a dividend, but the shareholders don't pay taxes.

in reality I am far from convinced that buybacks help shareholders as much as dividends, in no small part due to the OPs note that management tends to buy back expensive shares...  and, in 2009, sell cheap ones.

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#3) On February 24, 2011 at 12:12 AM, russiangambit (28.97) wrote:

I don't think buybacks add shareholder value. It simply means a company has too much cash but little growth prospects. US is in pretty bad shapre now, i.e. consumption is flat, we are at something like70% utilization, so there is no reason to build up production. Yet, corporate profits are high, so they are flush with cash.

Another reason is physicological , of course. When shares are low it usully means earnings are low, times are bad so a company wants to have an extra cushion in cash. When times are good they feel they need to do something  with cash. At least, that is what every CFO is taught in their MBA class -)). 

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#4) On February 24, 2011 at 12:28 AM, truthisntstupid (91.09) wrote:

Want to see how good a job your company did with its share buybacks?

1) Go to  Get a quote for the company you're interested in.

2) Now look for and click on "Financials."

3) Now click on "Cash Flow."

4) Morningstar shows the last five years of any financial statement as part of its free content.

5) OK?   Now look down at "Cash Flows From Financing Activities."   Find "Common Stock Repurchases."

6) Look at either the amount spent in any given year or the amount spent on share repurchases over a 5-year period.

7) OK.   Now go back up and find and click on "Key Ratios." 

8) Another heading will come up labaled "Financials."  Find "Shares."   This is the average shares outstanding for each year going back 10 years including the years you're interested in.

9) Subtract the ending share count from the beginning share count.  

10) Divide the money they spent by the number of shares you came up with in step (9).  This is how much they paid per share for the shares they repurchased.

11) Now for the grand finale.  Find and click on "Performance."  Then click on "Price History."

 Get totally steamed when you (most likely) learn that they spent  significantly more per share that they repurchased than the shares sold at any time during the period.  This happens often.


Between 2004 year end and the end of 2009, PFE spent $21.27B on share repurchases.  The share count declined from 7,614M in 2004 to 7,045M in 2009, or 569M shares.

The shares were repurchased at an average cost of $37.38/share.

But since the end of 2004 the shares never went over $29.21.

Isn't executive overcompensation wonderful?  Because those disappearing buybacks provide all those wonderful stock options/grants for senior ececs and board members.

Still prefer buybacks to dividends?  OK.  But at least keep an eye on them and know what they're really doing and just how bad it is.

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#5) On February 24, 2011 at 3:09 AM, truthisntstupid (91.09) wrote:

Re:  "Disappearing"  Buybacks

 I want to clarify what I mean by that.   Obviously the company didn't actually spend  $37.38/share buying those shares back.  However, many of the shares repurchased were not retired.  They were instead reissued to execs and board members as stock options/grants.  

Then you figure the cost per share of stock repurchased using the money spent on buybacks and the actual decline in share count.

The problem is that the actual decline in share count is less than the actual number of shares repurchased.  It's as if a significant number of those buybacks just......disappeared.

In PFE's case, above, during the last five years the money they spent on buybacks comes out to 28% more than the highest price the stock has traded at since the end of 2004.

Nice.   I'll take dividends, thank you.


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#6) On February 24, 2011 at 7:17 AM, dbjella (< 20) wrote:

I wouldn't mind if a company bought shares and retired them.  But you don't hear too often of companies retiring shares.

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#7) On February 26, 2011 at 10:53 PM, truthisntstupid (91.09) wrote:


I'm not totally against buybacks, either.   I just thought I'd offer the above for people that don't realize how easy it is to check up on just exactly what's going on with their company's buybacks.  

Also, some shares may be used in acquisitions, etc, so if it looks very bad, one might dig a little deeper and not just assume they're all going to stock options/grants for execs/board members.

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