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 (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 (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