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Companies sure like to buy back their stock when it's expensive!!!!
Old 10-10-2017, 11:09 AM   #1
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Companies sure like to buy back their stock when it's expensive!!!!

Today's Walmart stock buyback announcement struck me, as it occurs in a heady market, and when Walmart stock is already close to 52-week highs, and not that far off from 5 year highs.

Quote:
Walmart is sweetening the pot for shareholders before its annual meeting, using the oldest trick in the book.

The retailer on Tuesday morning announced that it had authorized up to $20 billion in stock buybacks over the next two years. That's a massive amount of capital to be allocated for repurchases, which are frequently used by companies to boost shares during times devoid of other positive catalysts.
Walmart announces $20 billion buyback to boost its stock price - Business Insider

It seems so frequent that companies buy back their stock when the market is running up and at new highs. And then "whoosh" that cash is wiped out in the next downdraft. I remember a lot of buybacks in the 2006-2007 run up, then bam!

2015 had a large number of buybacks as debt was so darn cheap. That's a mechanism for low interest rates converting to asset inflation right there. Financial engineering. Alternatives - invest in the company (ok, out of ideas?) and increase the dividend, or even do occasional special (one-time) dividends.

I also expect cash from repatriation of foreign assets and lower corporate tax rate will go right into stock buybacks. These just seem irresistible.

Now - when a company has been beaten down for some reason, including a bear market, and has a lot of cash - then a buyback can make great deal of sense. Best bang for the buck.

But usually - they are just more than annoying and usually a way to transfer wealth from the current shareholders to company management. Share buybacks: What they are and why they may not work - Business Insider

Oh, wow - I didn't know buybacks were illegal until 1982!
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Old 10-10-2017, 11:13 AM   #2
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I totally agree.

I'm thinking part of it is human nature, when the stock is high, they think "we are rich". When the stock is beaten down they think "we are poor and the company is in trouble"
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Old 10-10-2017, 11:21 AM   #3
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And then there are the companies who have a large layoff, and then turnaround and buy back stock.

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And yet, one wonders: if CSCO was indeed so focused on preserving cash and streamlining its operations would it also spend more than double that amount in just one quarter on repurchases.
2014: Cisco Sums It Up: Terminates 8% Of Workforce While Buying Back $1.5 Billion In Stock | Zero Hedge

And still more buybacks, with management happily selling their own stock. From April 2017:
Quote:
Over the last five years, Cisco’s board has plowed $27 billion into buybacks. What are they thinking?

.............

Translation: Cisco was—and is—fighting for its very life. Does Cisco’s board understand that buybacks heap additional risk onto the shoulders of Cisco shareholders?

Making it worse, John Chambers himself backed up his words by selling Cisco shares in his personal portfolio. The day of Cisco Live, May 19, 2014, when Chambers described the “brutal, brutal consolidation” that Cisco faced, he sold roughly $50 million worth of stock, as reported by Barron's. A year earlier in May 2013, and presumably already aware of the risk to Cisco, he sold about $38.5 million of Cisco stock, also reported by Barron's. And in the last three years, he’s continued to receive incentive stock awards—and he’s continued to sell.

So why is the board doing the opposite with shareholder cash? Why is Cisco continuing to repurchase shares when their executive chairman is selling?

.............

Since 2001, Cisco has spent about $96.6 billion on buybacks, which represents about 57% of the company’s entire market value today. Think about that.
https://www.forbes.com/sites/aalsin/.../#3717a94a4e5d
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Old 10-10-2017, 11:33 AM   #4
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Buy backs are considered a sell signal.
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Old 10-10-2017, 11:39 AM   #5
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Buy backs are considered a sell signal.
I certainly have tended to see it that way unless we are in a bear market and prices are down across the board.
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Old 10-10-2017, 11:46 AM   #6
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Could it be that Walmart exec's are itching to execute stock options while at the high end of the stock price and need to find a way to absorb the excess stock without tanking the price? What a better way than for the company to cover those positions.
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Old 10-10-2017, 11:54 AM   #7
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Could it be that Walmart exec's are itching to execute stock options while at the high end of the stock price and need to find a way to absorb the excess stock without tanking the price? What a better way than for the company to cover those positions.
It usually works in a similar way - new stock is issued for incentive stock options, and magically the company stock buyback plan buys back stock!
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Old 10-10-2017, 11:57 AM   #8
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The management has alot of $ riding on the stock price going up and buybacks are away to make that happen. Maybe they don't know any other way to make it happen. (no good idea for investment in the business to grow it.)
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Old 10-10-2017, 12:28 PM   #9
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They are betting on a bear market sometime during the next 2 years, and will time their buy backs accordingly.
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Old 10-10-2017, 12:39 PM   #10
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Companies buy their own stock to increase the earnings per share by reducing the shares outstanding. They see investing in growth as too risky or just not achievable. IBM is a perfect example of this.

CEOs are paid tens and hundreds of millions of dollars by increasing the share price, without regard to the long term impact on the health of the business.
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Old 10-10-2017, 12:39 PM   #11
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They are betting on a bear market sometime during the next 2 years, and will time their buy backs accordingly.
I sincerely doubt that. That is not what history tells us.
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While dividends represented the preponderance of cash returned to investors in the early 1980s, the move toward buybacks became clear in the 1990s, and the aggregate amount in buybacks exceeded the aggregate dividends paid from 2005 to 2007. In 2007, the aggregate amount in buybacks was 32% higher than the dividends paid in that year. The market crisis of 2008 did result in a sharp pullback in buybacks in 2009, and while dividends also fell, they did not fall by as much.

......

The problem with this signaling story is that it attributes information and valuation skills to the company’s executives that they do not possess. The fact that buybacks peak when markets are booming and lag in bear markets suggests that managers are not great market timers.
Isn't it ironic that buybacks drop during bear markets.



http://www.aaii.com/journal/article/...iagnosed.touch
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Old 10-10-2017, 01:16 PM   #12
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I think the practice is highly abused. I think the buybacks are "authorized" to stimulate the share price more than anything else. I'd like to see data on authorizations vs actual purchases including timing. I listened to a conference call once where the analyst asked why a buyback was announced that was less than the remaining balance from the previous buyback Caught the CFO off guard.
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Old 10-10-2017, 02:25 PM   #13
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Originally Posted by jazz4cash View Post
I think the practice is highly abused. I think the buybacks are "authorized" to stimulate the share price more than anything else. I'd like to see data on authorizations vs actual purchases including timing. I listened to a conference call once where the analyst asked why a buyback was announced that was less than the remaining balance from the previous buyback Caught the CFO off guard.
Oooh - that's a good one!

The CFO thinks an analyst won't notice? Maybe most of them don't. Bad!
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Old 10-11-2017, 09:28 PM   #14
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Companies buy their own stock to increase the earnings per share by reducing the shares outstanding. They see investing in growth as too risky or just not achievable. IBM is a perfect example of this.

CEOs are paid tens and hundreds of millions of dollars by increasing the share price, without regard to the long term impact on the health of the business.
I remember my last year of working at Big Blue. We were told that there would be no raises and our "earned" bonuses would be scaled back to next to nothing. All due to less than perfect earnings. A week later they announced yet another multi-billion dollar stock buy back plan. Last I heard they have spent a whopping $155 BILLION in stock buy backs since 2000.

I was glad to be able to help out by giving up my 3% raise and bonus. Oh, and the CEO made $17 million that year.
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Old 10-12-2017, 03:29 AM   #15
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Originally Posted by audreyh1 View Post
I sincerely doubt that. That is not what history tells us.


Isn't it ironic that buybacks drop during bear markets.



Stock Buybacks: Misunderstood, Misanalyzed and Misdiagnosed
Since buybacks are a form of dividend, and from your graph, since 1980 have grown to nearly equal dividends, maybe we should be adding in buybacks when we compare equity price to dividends. The current price/dividend ratio will be much smaller if we were to nearly double the divisor. Hadn't realized this before. Thanks for posting.
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Old 10-12-2017, 03:37 AM   #16
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I agree with the sentiment that companies buy back heir stock when they see nowhere else to invest their cash. Or they do it bc of the incentives for the C level execs to artificially raise the price.
Either way, to me it is not a good signal for the health of the company.

If you look at the IBM example above you should note that the shares repurchase over the last 10 years are worth less than they would be (substantially) than if they just out the money in a etf or mutual fund.
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Old 10-12-2017, 07:28 AM   #17
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Here's a wild guess about some of this incentive. In 1991 Clinton made a tax change in an effort to reduce top executive salaries. Any compensation over $1 million for the top 5 executives would be taxed to the company. Unfortunately, they excluded "performance" based pay from this extra tax. So stock awards that vested over time, based on some performance measure (such as company stock price) avoided this extra company tax.

So, if you're a CEO, I don't increase your salary. I give you vesting stock options. You have to make the stock price increase. How do you do that? You reduce your biggest expenses by reducing labor costs and cutting back R&D. You buy back your own stock to increase earnings per share. You're not going to be CEO for too many years, so why plan for the long term?

As stated in the first sentence, this is merely a wild guess. I'm not an economist!
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Old 10-21-2017, 08:55 PM   #18
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Another interesting article (2016) about stock buybacks discusses the case of IBM who has spent a lot of money on buybacks, meanwhile their market share has shrunk, and their stock price has dropped 30% (by mid 2016). Their business is going away - yet the reaction is to buy back stock like crazy.
Share buybacks: What they are and why they may not work - Business Insider
Quote:
IBM spent $4.6 billion in buybacks last year alone, and $125 billion in the decade prior, according to Reuters.Here's what it has to show for its efforts: In the past five years, its total share count is down by about one-fifth, and earnings per share are up 15%.

But actual net income in the same period? Down 11%. Sales have fallen, too.

Druckenmiller, who has been betting against IBM since 2013, cited the buybacks (rather than investment in the business) as a factor when he first made his case publicly against the company.

"They should be investing and taking on the challenge of the Amazons of the world. Instead they're cutting costs, they're buying back stock so their earnings look good," he told Bloomberg's Stephanie Ruhle in late 2013. "Very short-term thinking. When I look out on a couple of years I would think they've got issues."

And lately he has argued that this use of capital is a problem across corporate America.

“The corporate sector today is stuck in a vicious cycle of earnings management, questionable allocation of capital, low productivity, declining margins and growing indebtedness,” Druckenmiller said in May. “You can only live on your seed corn so long.”
And what are companies getting for all this cash spent on buybacks?

Quote:
The problem is that the buybacks may not be working. According to data from FactSet's Andrew Birstingl, the performance of companies engaging in buybacks has been disappointing.

"In the past year, companies repurchasing shares saw an excess weighted cumulative return of -1.9% relative to the benchmark, while companies not repurchasing shares saw a return of 9.8% relative to the benchmark," Birstingl wrote in his quarterly look at buybacks.

On a three-year horizon, those companies buying back shares ended up with a -2.9% return against a gain of 11.5% for those not doing repurchases. IBM, incidentally, has lost about $50 billion in market value since the end of 2013, or about 30%.
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