For the purpose of this article, I wanted to evaluate the effectiveness of stock buyback programs of large blue-chip stocks that have conducted extensive buybacks. Essentially, I am going to compare how many shares a company bought back with the number of shares that the company actually ended up retiring. If a company does not retire as many shares as it bought back, that means that the company simultaneously engaged in an action that diluted the share count. This could range from the creation of additional stock to pay management to the issuance of new stock after making acquisitions.
The first company that I will look at is Exxon Mobil (XOM). In 2004, Exxon had 6.4 billion shares outstanding. At the end of 2012, the company will have about 4.5 billion shares out standing. That is a reduction of 1.9 billion shares. The company actually bought back 2.5 billion, indicating that the company bought back 600 million more shares than actually got retired. The company experienced an increased total share count of 200 million in 2010 (compared to 2009) due to the XTO acquisition, and the company website does not issue an explanation for the other 400 million shares that did not get retired.
The next company buyback behemoth on the list is Microsoft (MSFT). In 2004, Microsoft had 10.8 billion shares outstanding. By the end of 2012, Microsoft will have about 8.3 billion shares left outstanding. That is a reduction of 2.5 billion shares. However, the company actually bought back 3.7 billion shares, indicating a 1.2 billion share difference between what the company bought back and actually retired.
IBM's (IBM) stock buyback program is an interesting case study because it has been a tremendous success that has also rewarded management handsomely over the intervening time frame. IBM has bought back 800 million shares of stock since 2004, but has only retired 500 million of those shares. Although a large chunk of the difference is due to generous compensation packages for top management, IBM nevertheless boasts that the 500 million retired shares have earned a 15.3% return over the course of the last decade's buyback program.
Cisco (CSCO) has reduced its share count to 5.3 billion by year-end in 2012 from 6.6 billion in 2004. That's a share count reduction of 1.3 billion. However, the company actually bought back 2.8 billion shares over that time frame, indicating that 1.5 billion shares did not get retired due to acquisitions and executive compensation.
Hewlett Packard (HPQ) has reduced its share count by 1 billion, taking the share count from 2.9 billion in 2004 to 1.9 billion by the end of 2012. The company had actually paid to retire 1.6 billion shares, indicating that 600 million shares did not get retired. Additionally, Hewlett Packard has generally not created value with its buyback program, because the company was accelerating its buybacks in 2007 when the stock price was in the $40s and $50s. Considering that the stock now trades below $15 per share, that has not worked out too well.
Since 2004, Wal-Mart (WMT) has managed to reduce its share count from 4.2 billion to 3.4 billion. That's a reduction of 800 million shares. Given that the company has bought back around 900 million shares over that time frame, there is a strong indication that Wal-Mart's announcement of a stock buyback program generally corresponds to a commensurate reduction in the company's share count.
One of the straightforward things about rewarding shareholders with cash dividends as opposed to stock buybacks is that the effects of a dividend are easy to calculate. If you own 100 shares of Coca-Cola (KO), and the company declares a $0.255 dividend, it is clear that you will receive a $25.50 quarterly check. That's very clear. Stock buybacks do not come with this kind of one-to-one certainty. Because acquisitions and compensation can dilute shares at the same time that the company is buying back shares, it is not safe to assume that when a $10 billion dollar company spends $1 billion on buybacks, it will automatically lead to a 10% reduction in share count. Because stock buybacks are promises as opposed to guarantees, and because stock buybacks can be simultaneously offset by share dilution, it is always worthwhile to compare the amount of money that a company spends on a stock buyback with the number of shares that actually get reduced.