Repurchase Vs. Market Value Change: A Look At Loews

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Includes: L
by: Pat Stout

Share buybacks may increase the share price but do they increase the value of the firm? Bloomberg recently had an article mentioning the share repurchase by Loews (NYSE:L). Let us take a look.

Loews ended 1998 with 112.6 million shares outstanding. The 4th quarter stock price high was $106 with the low of $82. The average market value was $10.55 billion. Loews ended 2011 with 396.6 million shares outstanding. The 4th quarter stock price high was $41.66 with the low of $32.90. The average market value was $14.75 billion. The change in market value was $4.2 billion. However this happens to equal the amount spent to repurchase stock from the end of 1998 through 2011. Thus investors enjoyed no net gain in market value.

  • 14.75 billion 2011 market value
  • 10.55 billion 1998 market value
  • 4.20 billion change in market value

Less (4.20) billion used to repurchase shares = 00.00 value added.

Year

Treasury Stock

Repurchased

(Millions)

Net

Income

(Millions)

2011 732 1064
2010 405 1288
2009 334 564
2008 33 4530
2007 672 2489
2006 510 2491
2005 none 1212
2004 none 1216
2003 none (597)
2002 351 912
2001 282 (587)
2000 306

1847

1999 602

363

Click to enlarge

An average of $323 million per year, or roughly 30% of net income, was used to repurchase shares. Investors may have enjoyed greater value had they received the funds as dividends. $323 million discounted at 5% has an implied value of $6.5 billion, at 4% $8.1 billion, at 3% $10.8 billion, and at 2% $16.2 billion.

Some may argue that share repurchases can increase earnings per share. To which I reply, does it make prudent financial sense to spend a $1 to add $0.05 to the bottom line? That is a 20 year payback.

If share repurchases are so wonderful why didn't they help at Lehman Brothers, Fannie Mae, Enron, Eastman Kodak, etc? Even the mighty Apple (NASDAQ:AAPL) has fallen since March 19, 2012 when they announced a share repurchase plan. The stock closed March 19th at $601.10 and on May 4th it closed at $565.25. Could it be investors want management to focus on their business and not the share price?

Source data from 10-k filings at sec.gov

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.