Share Buybacks

Discussion in 'Stock Market Education' started by baudwalk, Jun 18, 2015.

  1. baudwalk

    baudwalk Senior Investor

    Joined:
    May 2015
    Posts:
    1,459
    Likes Received:
    13
    There are divergent opinions on share buybacks. Are they done to prop up earnings-per-share numbers, or should money be better spent on capex? This is an interesting read on the business of share buybacks. Don't skim through it, and give it a second read to pick up the finer points of the article.

    http://investorfieldguide.com/buyback-extravaganza/
     
  2. crimsonghost747

    crimsonghost747 Senior Investor

    Joined:
    Mar 2014
    Posts:
    1,722
    Likes Received:
    6
    Well the thing is, a lot of people consider buybacks as "artificially raising the EPS" but I don't see anything artificial about it. One share accounts for a larger part of the company now, thus the shareholder is entitled to a larger part of the company's profits. If someone prefers to look at revenue or earnings instead of EPS, then they can look at those numbers.

    I'm not a huge fan of share buybacks, mainly because most companies don't use it effectively. They usually buy more when times are good... which is when they will be paying too much per share. But I still think it's necessary, mainly to stop dilution from executive compensation but also if there are no investments that make sense then you have to use that cash somehow and distributing it all out as dividends can have big tax consequences for the shareholders.
     
  3. JR Ewing

    JR Ewing Super Moderator Staff Member

    Joined:
    Feb 2014
    Posts:
    4,950
    Likes Received:
    39
    Not a big fan of share buybacks and other forms of financial engineering. Of course there are certainly worse things a company can waste money on, but there are also better things to do with it as well.
     
  4. coloradogy

    coloradogy Active Member

    Joined:
    Jul 2015
    Posts:
    25
    Likes Received:
    0
    I think it depends on how the share buyback program is implemented. Most companies use it as financial engineering to inflate stock price. Or they use it to offset executive and board member stock options. Personally the worst offender is General Electric. Not only did they have the small ones to announce in April their intent to use share repurchases to inflate earnings (dubiously to get them through their transition from a mixed financial-industrial company back to their manufacturing base) but their history does not show any positive results. Since GE departed on their massive share repurchase program, the number of shares have actually INCREASED!!

    On the other hand, some companies have implemented it correctly. Some have cited that they do not want investor money sitting around as cash. However, due to uncertainty in the future, they would rather not embark on large capex projects or mergers & acquisitions. Thus, who better than invest in a business you know and understand, yourself. Some companies who I believe have effectively executed a share repurchase program are Travellers and Lyondellbasell.
     
  5. crimsonghost747

    crimsonghost747 Senior Investor

    Joined:
    Mar 2014
    Posts:
    1,722
    Likes Received:
    6
    ^^ Another big name doing it wrong is Procter & Gamble. Their MASSIVE buyback program is almost cancelled out by their employee / executive compensation plans. So it looks like they are buying back a lot but in reality the share count isn't decreasing that much... so really most of the buyback budget goes into bonuses.

    But a decreasing sharecount is something that I do look for when evaluating companies to buy. There is nothing bad with using it as a way to keep the EPS (and dividend) growing as long as it's a sustainable strategy.
     

Share This Page