Data on Stock Buybacks

Posted by Jeff Carter
on September 8th, 2010

Stock buybacks are one of the worst uses of corporate capital. I read it as a bearish sign for the stock. A stock buyback only enriches investment bankers and option holders (management). It doesn’t enrich long term investors in the stock. Plus, it can put the company in a precarious financial position if the business environment changes.

Some companies have changed the language to “stock repurchases” to sound smarter. It’s still a stupid strategy.

Over at Ycharts, they have done a nice quick and dirty analysis of this on their blog. They quote the Oracle of Omaha, Warren Buffett, ““Repurchases are all the rage but are too often made for an unstated and, in our view, ignoble reason: to pump or support the stock price.”.

If the government is looking for a way to stimulate the economy. They ought to eliminate taxes on dividends. Then companies will distribute balance sheet cash to deserving shareholders, rather than buyback stock to line management pocketbooks.

For the record, I am an investor in YCharts. Even with that bias, it’s a great website. Try it.

UPDATE

This was timely. Motley Fool looked at exchanges. They used the metric, Return on Invested Capital(ROIC). It’s a Warren Buffett metric for efficiency and profitability. A good ROIC is 8-12%. CME (a stock I own) was 3.3%. Pretty shitty. They have engaged in a number of share buybacks since 2007. CME also has increased it’s debt load significantly since 2007. It has bought two other exchanges, CBOT and NYMEX in that time. Also has been aggressive with partnerships, engaging in an equity swap with BM&F. CME owns 98% of the CFTC regulated US futures market.

NYSE and NASDAQ are more efficient. But they are still under the 8% threshold.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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