Monday, July 9, 2007

comparing buybacks

It is always difficult to decipher the reason for a company buying back its own shares in a big way. What the company claims the reason to be, and what the reason actually is are often not the same thing. Most official statements include the phrase 'increased shareholder value'; however there are many specific reasons to buy back shares, that might not sound as warm and fuzzy within a press release that is automatically sent to you as a shareholder via the investment relations system. I think each buyback needs to be examined individually to determine whether it is a positive for shareholders or not.

Since it's difficult to determine why a company is buying back loads of it's own shares, lets look at some recent buybacks in terms of scale:

Johnson & Johnson (today), market cap = $183 B

Home Depot (June 19), market cap = $80 B

SHARE BUYBACK = up to $22.5 B

Wal-Mart (June 1), market cap = $200 B

SHARE BUYBACK = up to $15 B


ConocoPhillips (today), market cap = $137 B


Recent findings which appeared in the Journal of Financial Economics indicated that companies who buy back their own shares outperform the market by an annualized average of 3.1% over the next four years, after the repurchase.

I welcome any other recent examples, especially any that eclipse Home Depot's 28% of market cap.


FourPillars said...

This may not be directly related to the post but one thing I've read is that often companies will announce big buybacks and then they don't follow through with it.


Thicken My Wallet said...

IBM is borrowing $11.5 billion to buy back shares $12.5 billion of shares. The primary stated reason is to increase EPS.

Nurse B, 911 said...

Some companies also use buybacks as a strategic move to strengthen the positions of existing minority shareholders. This can help to bypass aggressive purchases of shares by those who's interests aren't in alignment with those of existing decision makers.

Anonymous said...

Well really, a buyback is nothing different from re-investing dividends through a DRIP. At the end of the day, the same thing is accomplished (although a buyback is probably cheaper for an investor due to tax implications).

Now, you look at a company like HD which is facing a rapidly declining business due to the crashing housing market, and it probably doesn't make a lot of sense to be re-investing the dividends in that business (I suspect, in the coming years, HD is going to find itself in a lot of trouble as housing starts dissappear in the US). JNJ, on the other hand, is a perfect example of a fundamentally sound business that will likely to see growing earnings for many years to come due to demographics and product mix.

Just my 2 cents.

moneygardener (AKA investor99) said...

4P, I've heard that as well. I guess most of the time no one follows up to check.

IBM = 7.7% (12.5/ 162)

b911, good point.

anon, I would argue that in the case of HD, at a time when the housing market is in a tailspin might be the best time to reinvest dividends.

Average Joe said...

One of the hopes is that the company is buying back the stocks because it feels that they are 'cheap'.

However, if they buy back the stocks at an 'expensive' price, then it is like throwing the money away.

So for Home Depot, is it smart to be buying back their shares now? Maybe if they wait the stocks will drop further.

Anonymous said...

HD isn't cheap by any means. It trades at 15X earnings, US retail is crashing, people can't HELOC any money to do renos anymore, and people who are in foreclosure are not dumping big money into their houses to fix them before they get dumped.

A buyback represents a monumental destruction of value in this entire sector which is already massively overbuilt, both in Canada and the United States.

HD is a good candidate for a short quite frankly. Its sitting at its 52-week high right now, and earnings revisions are all going down big-time.