Amazon.com (AMZN) is a respectable online retailer. It's a growing company and does not hand out a dividend, but they decided they wanted to try to give a little value back to shareholders. The key word is "try." In the first quarter of 2012, Amazon spent $961 million on buybacks that will likely only be realized in value under $200 million. Whatever Amazon's management might argue, I am going to make the argument that Amazon threw away nearly a billion dollars and might throw away more.
For anyone who does not understand share buybacks, the transaction is similar to when the stocks trade hands on the market. Except, after the company buys the shares, they are canceled. Why does a company do this? Share buybacks can be great for the owners who keep their shares. With less shares outstanding, the money the company has and the more the company is earning belongs to fewer shares. Fewer shares means more value per share. A company should want to buy back their stock at as low a price as possible and sell additional shares at as high a price as possible. If the company can't buy or sell shares at the right price, it might not be worth the change in value per share.
In 2010, Amazon's board of directors approved the company to repurchase as much as $2 billion of its shares without an expiration. This information can be found at the bottom of this 10Q. It was not until the first quarter of 2012 that the company bought shares under this plan. Amazon bought back its shares at an average price of $181.38 per share and bought back 5.3 million shares. This buyback amounts to 961 million dollars spent. If this money was distributed to all shares, instead of a buy back, shareholders would get $2.13 per share. This is big money to spend on buybacks, considering that in 2011 Amazon's net income was only $631 million. Here is what the results of the buy back look like, shareholder equity was $17.01 per share before the buyback and after it is $17.22 per share. In 2011, Amazon earned $1.38 per share. This buyback, if made before 2011, would have changed that number to $1.40 per share. Shareholder equity per share only increased by 21 cents and earnings per share, for 2011, would only increase by 2 cents. Unless earnings increase substantially, the buyback couldn't have added more value than 30-40 cents per share. Considering that $2.13 per share was spent, the decision to buy back looks like a bad one. An increase in value of 40 cents per share is an increase of 180 million dollars for all shares. What happened to the other 781 million dollars? It went in the pockets of the people that sold Amazon's stock to Amazon at such a high price.
There is only one defensive claim I can see management making towards my argument. They might claim this is the lowest Amazon's stock price is going to ever be. If they claim this, then either they know something huge about the company that we don't, or they are being naive about Amazon's stock. Why naive? Amazon's stock price has climbed high, but Amazon does not have value per share that deserves this price. By the looks of the price to earnings ratio, price to cash flow ratio, price to book value ratio, and just about any other comparison out there, Amazon is overvalued. It is only a matter of time before the value is realized and the stock falls. This is when Amazon should be buying back their shares. Now I think the buyback helped to keep Amazon overvalued, because the demand to sell Amazon stock was met by Amazon itself buying 5.3 million shares.
Many people, including myself, see huge potential in the Amazon. Potential has a price, and Amazon's is not worth over 100 times its earnings and definitely not near 200 times its earnings where it is currently. It can seem that since revenue is increasing dramatically that earnings will soon do the same. There is a problem though, the earnings are not keeping up, not even close. As revenue increases, profit margins get smaller. Amazon is also in the tablet industry and online streaming industry. Keeping up with the competition is holding down Amazon's earnings. If Amazon wants to continue in all of its ventures, the earnings are not catching up anytime soon.
Amazon made the same mistake many people have made. Amazon bought its shares at a price that is not supported by reality, but instead by future expectations that will not be met. Amazon buying back its shares was an irresponsible use of company cash. Now, over 700 million dollars will go to waste. If this company really wanted to buy back its shares they should have waited until the stock dropped dramatically. If the stock never fell, Amazon should have waited maybe 4 or 5 more years and took another look at the price to see if the value per share was fair. Amazon should not make the mistake of buying back shares at a high price again.