share buy backs

[stone]

Do share buy backs help you as a stock owner? If the company just kept the money as cash on their books wouldn't that support the stock price more effectively than a share buyback? From what I can see, share buybacks are typically used simply as a way to offset newly issued shares from employee stock options. As such they would be better off seen as part of the operational costs of  the company. Do elite share holders know how to capture volatility arising from share buybacks? Am I missing something or in a muddle about this?

[craigr]

Sometimes share buybacks are PR tactics as well. A company using cash to buy back shares of stock is interpreted often as confidence in management about future earnings and share price.

[stone]

I suppose hoarding cash would imply that they expect to make a SHTF screw up .

[melveyr]

Buybacks and dividends are the only methods to return value to the shareholders. If a company swore to never pay a dividend nor buyback stock (and the market fully believed them) the shares would be of no value. It wouldn't matter how much cash was on the books. Who cares if you never get a piece of it?

Buybacks and dividends are the actual return of value. Promises are nice too, but then the stock price is relying on faith (of future dividends/buybacks).

Let's assume that stocks didn't pay dividends; then it is the same concept as the MMT discussions that have been popping up on the forum. Governments issue currency (like a corporation issues stock) and then tax it to take it back (like a stock buyback). This underlying demand (or the market's belief of the underlying demand) provides the floor ensuring that the instrument has some value. Governments have a habit of issuing more than they buyback most years, and the instrument offers no promise of dividends (in corn, gold, wheat, oil or any other thing offering a use-value) leading to the long term decline of the instrument over time.

[smurff]

Keeping lots of cash also attracts corporate burglars and muggers, in the form of takeover attempts from inside and outside the company.  This can happen even if the cash pot is made up of employee pension money rather than uninvested funds from operations.  Takeover artists did leveraged buyouts, where they bought companies using some of the very cash on those companies pension plans.  They borrowed lots of money to buy, then used the companys cash to reward themselves  Much pension robbing happened a lot in the 1980s and 1990s, and the laissez faire regulatory atmosphere that prevailed let stuff like this pass. There was even a form of blackmail, called "greenmail" that was rampsnt in the 1980s until corporate directors put in place "poison pills" and "golden parachutes" to dissuade them.

Now if there's cash lying around that can't go to R&D or investments in new products (etc), it's going into share buybacks and special dividends.

[stone]

As a shareholder, wouldn't it actually be good to have the company an attractive target for takeover due to a cash pool? The take over people would have to buy all of the shares in order to get at the cash. By contrast share buybacks only return any value to you if you happen to be selling around the time that the buyback is taking place. If you hold right through then you won't see a cent of that money. Am I missing something?

[smurff]

When one company takes over another in a hostile (uninvited) manner, they usually fire all the executives at the target firm after they gain control.   Any remaining execs and senior managers are also in danger of losing their jobs.   So while there may be instances when some shareholders would welcome a hostile takeover, management--who control things--generally do not.

There are times when unsolicited overtures are welcome by all.  In those cases a company will approach the management of the target company and court them with joint R&D ventures, mutual appointments to boards of directors, joint sponsorship of non-business interests (like sporting or charity events), etc. Execs and their spouses from both companies start taking vacations together.  Over a period of weeks or months both companies become so intertwined that the target company's management and shareholders likely will expect and welcome a takeover. 

[moda0306]

Buybacks and dividends are the only methods to return value to the shareholders. If a company swore to never pay a dividend nor buyback stock (and the market fully believed them) the shares would be of no value. It wouldn't matter how much cash was on the books. Who cares if you never get a piece of it?

Buybacks and dividends are the actual return of value. Promises are nice too, but then the stock price is relying on faith (of future dividends/buybacks).

Let's assume that stocks didn't pay dividends; then it is the same concept as the MMT discussions that have been popping up on the forum. Governments issue currency (like a corporation issues stock) and then tax it to take it back (like a stock buyback). This underlying demand (or the market's belief of the underlying demand) provides the floor ensuring that the instrument has some value. Governments have a habit of issuing more than they buyback most years, and the instrument offers no promise of dividends (in corn, gold, wheat, oil or any other thing offering a use-value) leading to the long term decline of the instrument over time.

Never thought of that, melveyr.  One thing I think is funny about those that try to compare corporate earnings to a bond's interest rate is that it's probably MUCH more important that stocks have good earnings when you sell them then when you buy... a bond not only pays interest, but you are contractually obligated to get a fixed amount back at a fixed point in time.

[stone]

I can see how buybacks are an appealing way to spend money for the management. They mopp up all the new shares issued as employee stock options and, as smurff says, they protect against takeovers. I still haven't heard anything to explain why shareholders put up with them. Why not replace the management with a management that doesn't indulge in buybacks?

[MachineGhost]

I can see how buybacks are an appealing way to spend money for the management. They mopp up all the new shares issued as employee stock options and, as smurff says, they protect against takeovers. I still haven't heard anything to explain why shareholders put up with them. Why not replace the management with a management that doesn't indulge in buybacks?

The problem isn't buybacks per se, but the options issuance.  Shareholders en mass have not caught on to the fact that options issuance dilute the existing shares and that most buybacks are just to offset the issuance.  That's a relatively new concept in the grand scheme of things, only about 9 years old.

Steve Jobs was the worst rapist of shareholder value of them all through relentless options issuance to himself and his cronies.

MG

[melveyr]

I can see how buybacks are an appealing way to spend money for the management. They mopp up all the new shares issued as employee stock options and, as smurff says, they protect against takeovers. I still haven't heard anything to explain why shareholders put up with them. Why not replace the management with a management that doesn't indulge in buybacks?

The problem isn't buybacks per se, but the options issuance.  Shareholders en mass have not caught on to the fact that options issuance dilute the existing shares and that most buybacks are just to offset the issuance.  That's a relatively new concept in the grand scheme of things, only about 9 years old.

Steve Jobs was the worst rapist of shareholder value of them all through relentless options issuance to himself and his cronies.

MG

Boy I am glad I wasn't a shareholder of Apple! Wait... 

[stone]

  Shareholders en mass have not caught on to the fact that options issuance dilute the existing shares and that most buybacks are just to offset the issuance. 

Well what else do they think buy backs are for Do they each think that the buy backs will eventually leave them as the sole owner of Apple or whatever? Don't they smell a rat when the number of shares on issue doesn't decrease?

[stone]

There was something about this in http://seekingalpha.com/article/323731- ... erformance

In a recent research report by Thomson Reuters they note that a company's stock buyback activity generally does not add value subsequent to the buyback. A reason cited is the fact companies generally have more cash on hand in good economic environments and this tends to be after the stock price has already reflected a more positive operating environment. The report concluded:

...most companies in the S&P 500 index have not been successful in adding value through stock buybacks in the time frames we observed. The positive correlation between buyback activity and price suggests a combination of poor market timing as well as policies that increase repurchases when firms have more free cash flow. This may be partially explained by the need for officers of public companies to make some use of the cash on hand, including keeping less of it due to the possibility of being taken over. The negative correlation between repurchases and forward returns shows that most buybacks did not pay off within the year after purchase.

Even for the market (S&P 500 Index) overall, the increased buyback activity occurs at ever increasing price levels.

I'm wondering whether a buyback orientated market might require tighter rebalancing bands than would be the case in a dividend paying market. Perhaps it is vital to always be selling when the companies are buying back rather than just riding it out

[Jake]

The way someone explained how to view share buybacks to me was that they are a sure sign that the management has no good ideas for growth. That kind of made sense to me, especially as I was working for a large corporation in 2008 that undertook a massive share buyback scheme in the 12 months leading up to the stock market crash. Ouch.

[stone]

The way someone explained how to view share buybacks to me was that they are a sure sign that the management has no good ideas for growth. That kind of made sense to me, especially as I was working for a large corporation in 2008 that undertook a massive share buyback scheme in the 12 months leading up to the stock market crash. Ouch.

Jake, that sounds just like what they were saying happens all to often. As an aside, it seems a shame that it is seen as a problem if a company isn't growing. If a company has a niche market and serves that very well, then perhaps it is possible to have a nicely profitable, stable company that just keeps abreast of that small market and doesn't expand and doesn't stray. In that situation, paying dividends would be a sensible way to use the excess cash IMO. Perhaps the tax system makes that unappealing. Perhaps also cheap credit for leveraged buyouts also causes the demise of such companies. I heard that German "mittlestand" manufacturing companies are the pillar of the German economy. They are typically low debt and low growth small niche private companies that each do what they do much better than any competitor could ever hope to. http://en.wikipedia.org/wiki/Mittelstand

I guess in the company you were working for, the management had share options that they were wanting to cash in and so were trying to use the buybacks to briefly pump up the share price. They perhaps didn't mind what happened after the options were cashed in.