Surging share buybacks could make 2011 a record year. But do they add value?
With companies flush with cash and the stock market in a tumble, stock buybacks are running at a near-record pace. According to a Bloomberg report, stock repurchase plans are going at a rate that could make 2011 “the third biggest year for buybacks since at least 1985.” But is this the best outlet for that extra cash?
No one can predict where the market is heading, so the question of whether companies buying their own shares adds shareholder value is a big one. And a recent opinion piece in the Financial Times asks just that question. “Far from buying when prices are low and falling, companies in the US and the UK invariably step up buy-backs when their shares are selling at or close to the peak, and they do so on a large scale,” wrote Richard Lambert, a former editor at the paper. This has occurred to the level where buybacks “now regularly exceed the value of cash distributed to shareholders by way of dividends,” which, he wrote, imply value destruction on a large scale.”
Jim Cramer of CNBC also regularly rails against buybacks at just about every opportunity, calling them “a gigantic waste of corporate money” in some cases. This is mainly because of his view that companies are lousy stock pickers.
Much of the push behind companies scrambling to use growing cash piles is shareholder activism (see related story here). Activist shareholders from Ralph Nader to hedge funds are pushing for more action on company cash. In the FT, Mr. Lambert includes, along with institutional investors who have little interest in the company’s long-term well-being, investment banks that are clamoring for fees from promoting buybacks.
Most offer dividends. Treasurers in the NeuGroup universe are fairly mixed when it comes buying back stock, increasing dividends or doing more M&A. Some take a hard line against buybacks and dividends, like the treasurer at the NeuGroup’s Treasury Group of 30-2, who said at a spring 2011 meeting that dividend and share buybacks “reflect the inability of management to find better uses of cash.” At the same time, this member said having the surplus at all increased the “likelihood of spending money poorly.”
Some take a more balanced approach. One member of the NeuGroup’s technology treasurer’s group, the Tech20, said at the fall 2010 meeting that his company’s surveying of shareholders usually led to a 1/3, 1/3, 1/3 split between buybacks, dividends and investing in the business through organic growth or M&A. Still another treasurer takes the Cramer view: his company views buybacks as generally risky and destroying value if the stock price subsequently drops below the repurchase price.
Overall, it seems many NeuGroup peer group member companies opt for dividends or M&A. In a pre-meeting survey of T30-2 peer group, most respondents, or 54 percent, said they had an increased appetite for dividend payouts in the last two years, whereas the appetite for share buybacks had only increased for about 38 percent of members.
One of the conclusions drawn from the Tech20 meeting was that members should keep buybacks in proper perspective, and viewed as any other investment. And as with other investments firms should have a means to measure the success of their buybacks. This is something on which Mr. Lambert agrees. In his Op-Ed, he advocated the ideas of Terry Smith, the CEO of broker-dealer Tullet Prebon, who suggests that management “should be required to justify buy-backs by reference to the price paid and the implied return on the investment, and to compare this with alternative uses of the cash.”
Oh, and don’t get rattled by loud activist investors.