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.
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