When I contemplate a potential investment, I often think in terms of presumptions. For instance, if I'm considering an investment in Berkshire Hathaway (BRK.B), I can respect Buffett's decision not to pay out a dividend because he has successfully increased the compound's book value by 20% over the past forty years. Likewise, I can trust Autozone's (AZO) management when they talk buyback policy, because Autozone has successfully reduced its share count from 152 million shares outstanding in 1998 to 36 million today, propelling the stock's price from $25 in 1998 to $392. And lastly, I can give AT&T (T) management the benefit of the doubt when it waxes poetic about its long-term commitment to maintaining the dividend, because management regularly cites non-core assets that could be available for sale if necessary to maintain the payout (the wisdom of doing this, of course, is a separate topic).
But not all my presumptions about management teams are positive. Bank of America (BAC) has one of the worst capital allocation records of any large-cap American company in the past decade. The decision to acquire Countrywide is on the short list of worst acquisition in American corporate history. And when it comes to handling the share count, Bank of America has been equally bad. From 2000 to 2010, Bank of America spent $30 billion buying back stock that is worth a bit over $5 billion. That was enough to qualify Bank of America's buyback program as the 8th worst among large-cap companies over that time frame.
And to make it worse, the company's earnings power collapse during the financial crisis caused the company to double the share count (read: dilute the shareowners) so that every dollar of profit generated per share in 2007 only represented around $0.50 per share in 2009. For those of you who want the hard numbers, Bank of America increased its share count from 4.4 billion in 2007 to 8.6 billion in 2009 (as if we needed any more insult to add to the shareholder's injury, this came during a period when the stock traded in the $3-$10 range, making the dilution especially punitive). That's why I haven't joined in the fanfare that has accompanied this recent announcement about Bank of America's capital allocation plans:
Bank of America CEO Brian Moynihan said Thursday the bank is well-positioned to return capital to shareholders.
"We have simplified our company, and we have more than adequate capital to support our strategic plans," Moynihan said in a statement. "We are well positioned to return excess capital to our shareholders. We believe buying back common shares is the best way to continue to drive value for our shareholders."
Bank of America said it will repurchase up to $5 billion of common stock and redeem about $5.5 billion in preferred stock after it won Federal Reserve approval Thursday for its capital plan.
But the Charlotte bank said its quarterly dividend will stay at 1 cent, where it has remained since the aftermath of the financial crisis.
The Fed ruling, which allows Bank of America to return capital to shareholders, was part of a broader examination of the capital plans of 18 of the nation's biggest banks. The Fed approved the plans of 14, including Wells Fargo. It gave conditional approval to the plans of JPMorgan Chase & Co. and Goldman Sachs and objected to those of BB&T Corp. and Ally Financial.
The results follow last week's announcement of how major banks performed in the federal "stress tests," which gauge how lenders would fare in a severe economic downturn. Bank of America, Wells Fargo (WFC), BB&T (BBT) and nearly all the rest of the nation's 18 largest banks passed the tests. …
Although Bank of America has changed the man at the top by replacing Ken Lewis with Brian Moynihan, the fact remains that over half the Board that was in place during the financial crisis are still around today. Because the Board consists of many of the same people that destroyed $25 billion in shareholder value during the previous stock buyback years (and then went on to subsequently dilute shareholders by doubling the share count between 2007 and 2009), an obligation to give this buyback program close scrutiny seems well deserved.
In practice, the phrase buy-and-hold should properly be understood to mean buy-and-monitor. The announcement of a stock buyback program is the first move, not the last. It is our responsibility as investors to closely follow the quarterly updates of the company's share count (and compare the money spent on stock buybacks with the amount of shares actually retired), and from there, we can begin to make determinations as to whether Bank of America's stock buyback program deserved the 4% spike that investors were willing to give it on Friday. The last thirteen years have demonstrated that Bank of America leadership does not deserve the benefit of the doubt when it comes to conducting a share buyback, and we as investors should not give them such a presumption. Until the shares are actually retired at a reasonable price, we should set aside the pompoms and wait to cheer another day.