Beefs On Buybacks Finally Gain Some Traction
At long last, the problems and perils of poorly-conceived and poorly executed share-buyback programs are starting to get the attention they deserve.
Leading experts, including many from the business community itself, like Larry Fink of BlackRock, are blaming excessive buyback programs for the sluggish economic recovery, for artificially hyping executive bonuses, for contributing to expanding income inequality and for causing U.S. companies to lose their competitive edge by underinvesting in things like R&D, in improving and expanding their basic infrastructure, and by failing to invest enough cash in regular employees themselves. The upcoming elections promises to throw these issues into even higher relief. Even the SEC has been quietly hinting that maybe buyback programs need more sunlight cast upon them - a sentiment we have been expressing for over five years now: “We’re looking at our disclosure regime for buybacks…as part of our disclosure effectiveness review” Chairman Mary Jo White told an industry conference in March.
Apropos, a February 4th article on Marketwatch cited two big buyback flops in recent months, illustrating how much buyback money literally goes up in smoke these days - while failing to mention, we’d note, the historic propensity of U.S. companies to buy back at the highs and to sit the bench at the lows, which further exacerbates those buyback busts:
“In February, GoPro said that it spent $35.6 million to buy back stock during the fourth quarter, at an average price of $23.05, but to little avail. The company still reported a surprise fourth-quarter loss, and provided a dismal first-quarter sales outlook…the stock ended the fourth-quarter [at] $18.01, which was 22% below the average price the company paid to buy them back… On Thursday, it tumbled 8.5%, toward a record closing low, that was nearly 60% below what the company paid just a few months ago.”
Apple Inc. came under the Marketwatch microscope too: “The technology giant repurchased 281.12 million shares in open-market transactions over the past five quarters, at a weighted average price of $117.48, according to an analysis of data provided in the company’s latest quarterly filing. The stock was trading at $96.60 in afternoon trade Thursday, or 18% below the average price the company paid.”
The inimitable Gretchen Morgenson of the New York Times also weighed-in in March with a column on “Sacrificing the Future for a Mirage” – which homed-in on buybacks at Yahoo and McDonald’s and offered a very interesting way to look at the results, citing studies by Corequity, an equity valuation firm used by institutional investors. Since 2008 McDonald’s spent almost $18 billion on buybacks…which “helped [emphasis ours] produce 4.4% increases in annual earnings per share over the period.” But…“to equal that growth in overall earnings, the company would have had to generate just a 2.3 percent return on the money it spent buying back stock” according to the developer of the Corequity methodology, Robert Colby.
It’s been five years now since the OPTIMIZER first predicted that “The Next Big Thing in Corporate Governance” will be “Activists holding Directors’ feet to the fire over their stewardship of corporate assets”… And yes, while activists held their feet to the fire, for sure, many of them called first and foremost for big buyback programs, where increases in stock price were often fleeting, and benefitted only short-term investors who took the profits and ran off - and where a lot of the assets ultimately went up in smoke - yet again!
The time has come, we say, to focus on the STEWARDSHIP part - and to call for full and complete accountings of director stewardship of corporate assets - and especially the corporate cash register - on a quarterly, annual and five-year basis.