Why I've Always Been A Little Leery Of Stock-Buybacks

[ownyourfuture]

I'm an Apple shareholder & obviously happy with the recent share price surge.


But the following story explains much more eloquently than I ever could, that share buy-backs aren't the slam dunk 'some people' believe they are.

Don't be fooled by Apple's record high

 

[bw5972]

I've been an Apple shareholder since the split adjusted price of $7. I have no complaints.

 

[ENIAC]

I don't think I understand the complaint of the article.

The author seems to be saying that Apple's record high per-share stock price is deceptive, in part because stock buybacks have partially masked a decline in earnings per share. From the article: "Record stock prices don't mean record performances."

It seems like a mistake to equate "stock price" and "performance". Just knowing a company's share price by itself is insufficient to determine if it's a good value or not.

Yes, Apple's earnings have declined in the last year. The author points out that recent stock buybacks partially obscure the drop in earnings per share. This just seems to highlight the limitations of using EPS by itself as a valuation metric.

Buybacks aren't intended to change the fundamentals of a company. They're just a way of returning cash to shareholders. What am I missing?

 

[NW-Bound]

I do not own Apple shares, nor follow the company. However, I would continue to hold it for a while to see what happens after the iPhone 8.

The article makes the point that the 6% reduction in outstanding shares still did not match the 15% reduction in earnings, making the rise in price unsupported by the fundamental. However, the market often anticipates future rise in earnings, whether that will pan out or not, and bids up the price in advance.

If Apple's earning does not improve, at some point the company will run out of cash for share buyback, the stock price will reverse. Again, I would hold out for a bit longer to squeeze out some more gains. It has just recovered to where it was 2 years ago, and if one has waited this long, why not a bit more patience?

 

[Texas Proud]

One of the components that is not looked at when looking at the ratios is that Apple has something like $250 billion in CASH sitting around...

It is not a normal stock where P/E is comparable to others...

 

[NW-Bound]

Ah, now this thread gets me more interested in this, although I have no Apple shares currently.

A bit of searching on the Web shows that most of Apple's cash is from overseas sales, and it cannot bring it home without suffering a 40% tax cut. So, that pile of cash is not really as big as it seems. If tax laws do not get changed, its pile of cash is only $246B x 0.60 = $147B. Still a lot of money, right?

But then, as it cannot or does not want to touch that cash, it raises debt at home for operations. As of one year ago, it had "$53.2 billion in long-term debt obligations as well as $32.2 billion in non-current liabilities".

Suddenly, the net cash level does not look as good as it originally sounds.

 

[nash031]

I'm looking to unload my Apple shares. Not sure if this level or another. Relative to the market, they're actually below peak "value" but not sure if I'm going to wait out the 10th Anny iPhone or not. Perhaps I will continue to hold as I have for the last 9 years after purchasing in the 2008 dip.

 

[Hamlet]

One of the components that is not looked at when looking at the ratios is that Apple has something like $250 billion in CASH sitting around...

It is not a normal stock where P/E is comparable to others...

Also, Apple's PE has almost always been at a discount to the market, which seems strange given their performance.

A stock that is reasonably priced on fundamentals that is buying back their stock aggressively? Seems like one to hang onto.

 

[NW-Bound]

Both Apple gross sale number and net profit dropped from 2015 to 2016. When that happens, investors value a company at a lower P/E ratio. Rightly or wrongly, they feared that the company was on a death spiral. The same thing is happening right now with Gilead.

Now, they are thinking the company prospect is improving. Time will tell. Any investor can step up and place his bet.

 

[Totoro]

It seems Berkshire just did Supposedly not Warren though.

 

[ownyourfuture]

Some interesting replies.
Thx

 

[respond2u]

Buybacks aren't intended to change the fundamentals of a company. They're just a way of returning cash to shareholders. What am I missing?

I'm skeptical of buybacks in companies whose executives are measured on Earnings per share.

For those companies, I'm pretty sure buybacks are intended to change the fundamentals...

 

[NW-Bound]

As much as we shareholders like to think of ourselves as owners of public companies and that the executives are our employees, the latter and the boards really run the companies as theirs.

All we can hope for is when they enrich themselves, the shareholders can get along for the ride. Sometimes that is true, sometimes the opposite.

 

[Turboslacker]

I have applied the same philosophy as an employee of a publicly traded company. When I see financial engineering by upper mgmt I buy and hold Co stock. I feel if the Execs are going to get rich off of stock appreciate then I will make money as well dammit. I consider it an offset to the takeaways of employee total compensation that partially enables posting good quarterly results to Wall Street. Amazing how well this has paid off for me during a 30 year career.

 

[Totoro]

Anecdote, not data:

The local telco incumbent here had a CEO that got measured on EPS and share price appreciation over multiple years. The evil thing was that there was an exponential reward curve: his payoff went up much faster than the associated EPS. So dividends went up, EPS went and the stock soared. Then he decided to retire, right when the latest set of multi-year KPIs came due. He beat them all by a large margin.

Enter his successor, the former CFO. He started and within a year he had to slash dividends while earnings cratered. Three years later new capital was raised. Stock price went down like a rock, I believe -90%.

What happened? Well, said telco didn't invest in infrastructure, and went all out in cost savings. This allowed the competing cable company to get a lead in internet speeds. Telco should have invested in fiber optics, didn't do nearly enough. Before the years of neglect caught up, the CEO was gone.

Worst part of all was that the ill-conceived incentive package wasn't publicly disclosed (don't ask how I know).

So I'm not leery of buybacks in themselves, but very much so regarding the structure of incentives. Sadly, it's still not common to fully disclose this and do it the smart way.

 

[NW-Bound]

Yes, watch the executives for their stock selling. When they bail, you know they are up to no good. There have been quite a few scumbags like the above.

The problem is that an investor cannot keep up with all the info, even though the SEC requires all stock sales by the executives to be reported.

 

[ownyourfuture]

Anecdote, not data:

The local telco incumbent here had a CEO that got measured on EPS and share price appreciation over multiple years. The evil thing was that there was an exponential reward curve: his payoff went up much faster than the associated EPS. So dividends went up, EPS went and the stock soared. Then he decided to retire, right when the latest set of multi-year KPIs came due. He beat them all by a large margin.

Enter his successor, the former CFO. He started and within a year he had to slash dividends while earnings cratered. Three years later new capital was raised. Stock price went down like a rock, I believe -90%.

What happened? Well, said telco didn't invest in infrastructure, and went all out in cost savings. This allowed the competing cable company to get a lead in internet speeds. Telco should have invested in fiber optics, didn't do nearly enough. Before the years of neglect caught up, the CEO was gone.

Worst part of all was that the ill-conceived incentive package wasn't publicly disclosed (don't ask how I know).

So I'm not leery of buybacks in themselves, but very much so regarding the structure of incentives. Sadly, it's still not common to fully disclose this and do it the smart way.

You wouldn't be talking about Frontier (FTR) would you ?

 

[Closet_Gamer]

There is some potential that a tax deal on Washington could allow Apple's overseas cash to be repatriated at a much more favorable tax rate.

Some of the move may be the market pricing in the risk-adjusted value of this possible repatriation bonanza.