Stock Buybacks Might Be Worse for You Than You Think -- But Nice for Management

Includes: HSY, IVV, LLY, PG, SPY
by: Judith Levy

Excerpt from our Wall Street Breakfast, a one-page summary of this morning's key market-moving and stock-moving stories:

Why Buybacks Aren’t Always Good News [New York Times]

Summary: The S&P 500 is on track to buy back a total of about $435 billion worth of company shares this year, more than the $349 billion repurchased in 2005 and more than triple the $131 billion in 2003. Investors generally cheer buybacks, since they prop up stock prices and pad EPS by reducing the number of shares outstanding. But those virtues can conceal downturns and deprive companies of cash they might need later. Buybacks also place shareholders at the mercy of management, who can reintroduce the shares into the market at any time. Worse yet, when buybacks are used to cover stock option grants issued to management, they can destroy shareholder value if the purchases are made when the share price is high. Over the past two years, 78 S&P companies have conducted buybacks that resulted in negative cash flow, and 33 of those then used EPS as a measure by which to compensate executives -- begging the question whether the buybacks were intended specifically to boost bonus payouts. A study by the Center for Financial Research Analysis concluded that CEOs at share-repurchasing companies and at companies using EPS as a metric for executive assessment were more likely than others to receive bonuses, and the bonuses at negative-cash-flow companies tended to be higher. The study also noted that eight companies, including Eli Lilly, Hershey and Procter & Gamble, use EPS to gauge both short- and long-term value growth, “a very poor governance practice resulting in the same set of performance achievements being rewarded twice.”
Related links: Commentary: Red Hat Confidently Announces Share BuybackCBS Announces Stock Buyback to the Chagrin of Its InvestorsAmazon's $500 Million Buyback Plan -- Dumb MoneyIs Sears' Stock Buyback a Good Idea?
Potentially impacted stocks and ETFs: Eli Lilly (NYSE:LLY), Procter & Gamble (NYSE:PG), Hershey (NYSE:HSY) • ETFs: Standard & Poor's 500 Index Depository Receipts (NYSEARCA:SPY), iShares S & P 500 (NYSEARCA:IVV)

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