By most lights US corporates have become infatuated with how buyback strategies increase EPS. They’re certainly ignoring the naysayers and aren’t considering what The Wall Street Journal highlights as “overwhelming results that heavy buyback companies usually create less value for shareholders over time.”
The share repurchase trend has also raised questions among those who believe companies could do better by reinvesting that cash into growth projects. This is true among The NeuGroup universe of treasurers, some of whom in the past have said share buybacks is just lazy cash management.
But the trend continues. Among big names recently, Ford announced a $1.8bn share buyback program and Apple’s board increased its share repurchase authorization to $90bn from the $60bn level announced last year. According to Goldman Sachs, S&P 500 companies repurchased or paid out about $800bn in share buybacks and cash dividends in 2013 and are expected to up that to about $975bn in 2014. Among NeuGroup peer group members, many embark on them as a way to offset dilution from option programs as well as utilize excess cash.
At a recent NeuGroup Treasurers’ Group of Thirty (T30) meeting, members participated in a roundtable discussion to share their buyback strategies and discuss how they balance the program to ensure the most efficient execution possible. Here is a little of what they discussed.
Members have previously discussed the market theory that executive management teams sometimes become too obsessed with how share repurchase increases EPS and how it can then become difficult to wean them away from this mentality. But it was generally agreed that having a structured program in place helps to level-set the expectations among Board members, while at the same time making efficient use of excess cash.
And among those who do buybacks, strategies tend to vary. Most members of the T30 use accelerated share repurchases in addition to open market trades to allow for the greatest possible flexibility. Dollar-cost averaging is used by several members and is seen as a way to help quiet the critics when it comes to questions about purchases at specific strike prices.
All members agreed that as long as markets behave normally, stock buyback would continue, but in the event of crisis, it could be scaled back or stopped at any time. As one member noted, “Don’t deliver EPS just by buying back shares.” Most repurchase programs also are approved either quarterly or annually and have a clearly defined grid structure that shows order levels at a variety of prices.
So despite the criticisms, the buybacks continue. For the most part, it has been said that boards have become bored with debt reduction as the primary way to use excess cash so have gone to what they feel are shareholder-friendly activities like share repurchases and dividends. And there’s usually enough for both at the same time.