New Analysis From Fortuna Advisors Reveals Mostly Awful Returns On Investment In Share Buybacks
Wake corporate treasurers, governance advisors…and directors too! The focus on the deployment of corporate assets – and particularly on the use of hard cash – has, as we warned here, way back in 2011 - come very much further to the forefront these days. Harsh focus will surely come your way soon if you are in the bottom two-thirds of the pack, ready or not…
“The Institutional Investors’ Corporate Buyback Scorecard” – a recent study of stock repurchases by S&P 500 companies over the past two years ending June 28, 2013 - designed and calculated by Fortuna Advisors - shows, very graphically, that, on the whole, US companies continue to buy at the high and sit the bench during low-points, with truly appalling results.
And while yes, some buybacks have been highly successful, the top-ten companies in the survey accounted for over 90% of the gains.
Meanwhile, “The median buyback company delivered a ROI of 3% - and three of every four companies delivered a buyback ROI of less than 10% - a common hurdle rate for capital investment.” Ouch!
The bottomtencompanies – including BofA, Citigroup and GE - repurchased $250 billion worth of shares at prices that averaged 94% higher than today’s. Apple - where Carl Icahn is currently insisting that Apple should borrow $150 billion to buy back MORE shares - saw its ROI skid by 43.1% over the two year period, while the worst company in the survey, Cliffs Natural Resources, saw its return drop by 54.3%.
What to do? Fortuna offered an amazingly simple solution to the buy-high scenarios that most buyback programs effectively guarantee: Commit to a level, pre-determined monthly buyback amount. Wow! Just like the ancient but tried and true advice about the benefits of “dollar cost averaging”: You automatically buy more shares when their cheap – and fewer as they rise – something one would think most CFOs woulda figured out before now…
We – as observes and as investors – still say “Show US the money…and give US a larger chunk of cash…so WE have it…and can do as we wish with it, rather to see it permanently “vaporized” and sent straight to money-heaven by bad execution – or by a fickle stock market.
Public companies need to seriously re-think here…and to prepare for very hard questions as investors begin to digest the FORTUNA analysis.
We say that smart companies will begin to monitor and report the results of their buyback programs – ideally with a special section in their disclosure of sources- and-uses of cash – AND with better and more robust MD&A where buybacks are concerned. But if not, no worries, as the headline says…smart investors will do it for you….Do remember: You read it here first!
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