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What makes a good share buyback? Barron's cites four factors: i) Shares are in a downtrend. ii)...

What makes a good share buyback? Barron's cites four factors: i) Shares are in a downtrend. ii) It's a long-term strategy and not a short-term fix ( = >1% share count reduction/quarter). iii) Shares are cheap based on price-to-book. iv) The company has a rising dividend. The stocks that pass the test? Wellpoint (WLP), Seagate (STX), Western Union (WU) and AT&T (T).
Comments (31)
  • George Fisher
    , contributor
    Comments (1540) | Send Message
     
    You need to add v) shares are retired and not recycled to satisfy management stock options
    31 Mar 2013, 12:17 PM Reply Like
  • Petrarch
    , contributor
    Comments (766) | Send Message
     
    quite right but it is also implied in (ii) above
    P
    31 Mar 2013, 12:51 PM Reply Like
  • George Fisher
    , contributor
    Comments (1540) | Send Message
     
    Petrarch,

     

    MSFT has a long-term strategy of spending shareholder operating cash flow to buyback shares to offset management options - and I don't think that is very shareholder friendly. Shares purchased need to be specifically retired and shareholders/owners need to see a corresponding reduction in shares outstanding. This is one item I check in all the annual reports I read - how has the number of shares outstanding changed vs how much has been spent on share buybacks.
    31 Mar 2013, 12:58 PM Reply Like
  • Tack
    , contributor
    Comments (13552) | Send Message
     
    This issue needs further explication:

     

    Below-market stock grants or options are dilutive. But, the vast majority of stock issuance to employees occurs via at-the-money options, not stock grants or in-the money options, as such would be immediately taxable to both the corporation and employees. The result is that such options do not turn into issued shares if and until the share price rises, such that exercise is a profitable event for employees.

     

    If it's profitable for employees, it will be profitable for other shareholders.
    31 Mar 2013, 01:04 PM Reply Like
  • RS055
    , contributor
    Comments (2810) | Send Message
     
    At the money options are valuable. When issued to employees - it is a cost to the outside shareholders. It is an expense - but is not captured in the income statement.
    If you take microsoft , since its IPO - cumulative cash has flowed from outside shareholders( as a whole) and the company - to the key employees. This is less so over the recent decade - but was egregious in its first 2 decades of existence as a public company. I believe this abuse of options is a large reason for why the company and its shares have been in the doldrums.
    31 Mar 2013, 02:32 PM Reply Like
  • Tack
    , contributor
    Comments (13552) | Send Message
     
    rs:

     

    How is it a cost to shareholders? How is it an expense? How is it not captured?
    31 Mar 2013, 02:38 PM Reply Like
  • CincinnatiRick
    , contributor
    Comments (425) | Send Message
     
    True...but that is also why existing shareholders prefer (or should prefer) X amount of available funds be used to increase dividends as opposed to share buyback. It is the option holders that disproportionately benefit from increases in share price. If the discount from book value is extreme, that advantage of cash dividends might be erased for the existing shareholders.
    31 Mar 2013, 03:03 PM Reply Like
  • davidbdc
    , contributor
    Comments (3165) | Send Message
     
    Tack,
    Every dollar used to buy back shares which are then issued to management is a cost to shareholders.

     

    If they spend $100 million buying back shares that then get issued to management as compensation - then 100 million has been shifted from shareholders to management.

     

    I'd say thats a very real cost. And its rampant at several of the companies I invest in.

     

    This all started back when Congress got riled up about a couple of underperforming CEO's that were getting paid over a million dollars. They changed the laws to raise taxes on companies that paid executives over $1 million and that kicked off the massive shift to equity grants and even further escalated executive pay - at the expense of shareholders.
    31 Mar 2013, 03:44 PM Reply Like
  • Tack
    , contributor
    Comments (13552) | Send Message
     
    David

     

    I specifically differentiated between grants and options issued at market.
    31 Mar 2013, 03:50 PM Reply Like
  • RS055
    , contributor
    Comments (2810) | Send Message
     
    Its a cost to shareholders in the same way paying salaries is a cost to shareholders.
    its an expense because it is exactly like cash compensation.
    It is not captured in the income statement because accounting rules do not require it. However, many companies provide non-GAAP income statements (in addition to the regular GAAP statements ) - that include the cost of options using Black-Scholes to value them.
    31 Mar 2013, 04:29 PM Reply Like
  • RS055
    , contributor
    Comments (2810) | Send Message
     
    You do realize that at the money options have a value right?
    31 Mar 2013, 04:32 PM Reply Like
  • Tack
    , contributor
    Comments (13552) | Send Message
     
    RS:

     

    I will repeat. There's a big difference between issuance of ATM options and the direct grant of shares or issuance of ITM options. The former has little or no tax consequences nor does it cost any shareholder a dime. It's an option to "buy" the shares at the same price being offered the market. Nobody gets anything free, and any gains achieved by employees in such case are only through appreciation of shares, which equally benefits other shareholders.

     

    It's popular to directly tie share buybacks to issuance of options or grants to employees. However, these are fungible events, and companies may issue options or grants in any case without the requirement to buy back anything.

     

    Now, one can complain about the amount and detail of compensation policies, as a general mater, but it's not clear how share buy-backs have anything to do with this subject.
    31 Mar 2013, 04:46 PM Reply Like
  • Tack
    , contributor
    Comments (13552) | Send Message
     
    RS:

     

    I fail to see your point. There are many, who, apparently, believe that companies routinely issue "free" shares to employees, which are paid in full from corporate treasuries, and that such shares emanate directly from buy-backs. Are you quibbling over the option value, itself?
    31 Mar 2013, 04:50 PM Reply Like
  • OldWarrior
    , contributor
    Comments (2510) | Send Message
     
    That is in the statement " ( = >1% share count reduction/quarter)"
    31 Mar 2013, 06:06 PM Reply Like
  • jaginger
    , contributor
    Comments (562) | Send Message
     
    Tack, you appear to be missing the dilutive impact that even ATM options have on a company with a share price that grows (even if that growth is very small).

     

    RS is correct.

     

    I can post more when I'm not on my mobile. But, i think if you ponder a bit you will understand the real costs.
    31 Mar 2013, 08:22 PM Reply Like
  • sandollar
    , contributor
    Comments (2) | Send Message
     
    "implied" is not "stated"
    In business there is no room for "implied"--- unless you want to fund the lawyers, who will gladly bill you to fix the results of your naivete.
    1 Apr 2013, 12:34 AM Reply Like
  • sandollar
    , contributor
    Comments (2) | Send Message
     
    ABSOLUTELY the NUMBER ONE factor. Why did it require a commentator to mention it, instead of Barron's stating it?
    1 Apr 2013, 12:35 AM Reply Like
  • Michael Bryant
    , contributor
    Comments (5615) | Send Message
     
    I only like (STX) out of the four.
    31 Mar 2013, 12:52 PM Reply Like
  • vireoman
    , contributor
    Comments (1007) | Send Message
     
    I've built a postion in WLP and will add on any dips. About once a year I strongly consider WU, but doubt I'll ever pull the trigger.
    31 Mar 2013, 01:08 PM Reply Like
  • Michael Fitzsimmons
    , contributor
    Comments (9039) | Send Message
     
    Here's an article on now *not* to do share buybacks: ExxonMobil: Buyback Heavy, Dividend Light:

     

    http://seekingalpha.co...
    31 Mar 2013, 01:16 PM Reply Like
  • RJKRJK
    , contributor
    Comments (141) | Send Message
     
    Question:
    Michael Fitzsimmons. is your comment supposed to read:

     

    Here's an article on "HOW" *not* to do share buybacks: ExxonMobil: Buyback Heavy, Dividend Light: ?
    31 Mar 2013, 01:47 PM Reply Like
  • Michael Fitzsimmons
    , contributor
    Comments (9039) | Send Message
     
    Hello RJK: let me clarify: in 2012, XOM spent $20 billion on buybacks, and only $10 billion on dividends. That 2:1 ratio is terrible for ordinary shareholders (but good for management). As a result of this over-emphasis on buybacks, the company pays the lowest dividend in its peer group. Meanwhile, the stock has gone essentially nowhere over the past 5 years. In my opion, the company's over emphasis on stock buybacks are unwise, unjustified, and not shareholder friendly. CVX has a much more balanced approach to shareholder distributions, and is running rings around XOM the last few years.
    31 Mar 2013, 03:48 PM Reply Like
  • Tom Armistead
    , contributor
    Comments (5410) | Send Message
     
    From Seagates fiscal 2008 10-K:

     

    "During fiscal year 2008, we repurchased approximately 65 million common shares through open market repurchases at an average price of $22.89 for a total of approximately $1.5 billion."

     

    During fiscal 2009, as shares traded at prices well under $5, the company didn't buy back any shares.

     

    I don't care what Barron's says, STX is stupid to buy back shares.
    31 Mar 2013, 01:46 PM Reply Like
  • DeepValueLover
    , contributor
    Comments (8661) | Send Message
     
    Nothing wrong with boosting the earnings per share by shrinking the float.

     

    Borrow @ 3% to generate a 14% earnings yield?

     

    Go for it!!
    31 Mar 2013, 02:10 PM Reply Like
  • RS055
    , contributor
    Comments (2810) | Send Message
     
    Paying out cash in excess of the needs of the business to shareholders as dividends is the simple, rational and honest thing to do.
    The tax structure makes it uneconomic to do the right thing! it gives executives a convenient excuse for share price manipulation through buybacks - to enrich themselves . Happy executives contribute to congressmen. Everybody happy!
    31 Mar 2013, 02:38 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4352) | Send Message
     
    I just finished reading a book that was about this very topic:

     

    http://seekingalpha.co...
    31 Mar 2013, 02:45 PM Reply Like
  • Destin
    , contributor
    Comments (472) | Send Message
     
    STX has more than doubled what was initially a very healthy 4% dividend in just two years since reinstating it, from $0.18 to $0.38. They've also retired about 20% of the float in that time frame. I'd say mission accomplished on both fronts. Anyone who bought at the absurd $10 level during the Thailand floods (which wiped out their only major competitor yet left them untouched) has a 15% YOC today.
    31 Mar 2013, 02:47 PM Reply Like
  • Josh Franklin
    , contributor
    Comments (977) | Send Message
     
    Audc bought back 10% of its stock in 2012 @ avg price of 2.75.

     

    Shares o/s went from 42 to 38 million.

     

    Company is profitable and cash flow positive.

     

    Company cut expenses by 10%.

     

    WebRTC will explode the shares in late 2013 and 2014.

     

    MSFT integrating Lync and Skype will show in q3/q4 2013.
    31 Mar 2013, 04:45 PM Reply Like
  • Dutch Trader
    , contributor
    Comments (1173) | Send Message
     
    I miss junket operator Asia Entertainment & Resources (AERL) in this story, maybe because it is an US-listed China stock.
    31 Mar 2013, 05:03 PM Reply Like
  • OldWarrior
    , contributor
    Comments (2510) | Send Message
     
    The problem with STX is not fundamental, but perception. With the over-reported "Death of the PC", the public views STX as vulnerable. Add to that, STX is known for Platter HD's, and the perception of movement to Flash Memory again scares people away. The truth is that STX is making more money and selling higher margin drives for Server Farms, as well as getting into flash is lost on those who just listen to the talking heads on CNBC. STX had a great run from ~December-Feb, has recovered the dip, but can it keep momentum?
    My question is, why did $INTC not make the list? It may be a bit controversial, but meets the standards you set.
    31 Mar 2013, 06:20 PM Reply Like
  • dancing diva
    , contributor
    Comments (2545) | Send Message
     
    IBM didn't make it either even though they've bought back more shares (as a %) than intc and have boosted their dividend by at least 10%/yr. I guess Barrron's only wanted to name a few names.
    31 Mar 2013, 08:07 PM Reply Like
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