If Your Stock is So Cheap - Why Aren't You Buying Back Shares Hand Over Fist?

Sep. 21, 2010 5:49 PM ETINTC
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Dividend Investing, Dividend Growth Investing, Contrarian

Contributor Since 2008

Brett earned his first contrarian investing profits in 2004 when he purchased an obscure investment (at the time): sugar futures. His friends on Wall Street stopped laughing soon enough when sugar rocketed to multi decade highs, illustrating that it indeed pays to be contrary. Brett quickly learned that the key to maximizing profits while minimizing losses is to invest against the crowd. He has since scoured the universe of stocks, commodities and options, searching for popular and tradable market misconceptions. Brett has been featured in The Economist, Forbes, The Globe and Mail, Chicago Tribune and Seeking Alpha. He is a graduate of Cornell University, with a degree in operations research and industrial engineering. In addition to his love of investing, Brett is an experienced technology entrepreneur. He co-founded two successful high-growth software companies, Chrometa, maker of the world’s most advanced timekeeping software, and LeadDyno, an online marketing tool for small businesses.

 When a CEO constantly bemoans the fact that his/her stock price is wildly undervalued by Wall Street - why don't they just jack up the dividend, and/or buy back stock hand over fist?

Intel's Paul Otellini is constantly scratching his head about the lack of air under INTC's price action - and he's not alone by any means amongst corporate CEOs, but I'm going to single him out for this example.

Intel had been sitting on a nice pile of cash, while paying a very respectable 3.3% dividend.  Yet INTC has traded in the same range for much of the last decade - granted it was wildly overvalued when we started the decade, but the lack of stock appreciation has nonetheless been frustrating for Intel execs and employees alike.

INTC 5 year stock price chart

INTC: Going nowhere, fast. (Source: Yahoo Finance)

So if you want to get investors' attention - why not boost that dividend a healthy amount?  Or buy back your wildly undervalued stock hand over fist?

Time will tell if Intel's recent "M&A binge" will deliver an acceptable ROI to shareholders.  The odds are against it, as Intel's M&A track record is not an envious one - which is similar to the fate of most corporate mergers...they are usually net losers.

Personally I don't understand why companies would complain about a low share price while sitting on a large hoard of cash.  Isn't that a golden opportunity to pick up an undervalued investment that will benefit both your company and its shareholders?

I can only think of 2 reasons:

  1. You do not actually think your stock is THAT undervalued, or
  2. You're not making the big bucks to buy back stock, so you feel pressure to reach for "growth opportunities"

As the old saying goes, "A Man's Got to Know His Limitations".  Perhaps a CEO's got to know his company's limitations as well.

But let me give Otellini his appropriate "props" for his recent remarks that Washington doesn't have a clue how to create jobs!

Disclosure: Long INTC

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