There is an old saying that stock buybacks are a good sign because they are proof a company’s best investment is in its own shares. Put another way, management thinks the market is undervaluing its stock – so it is more than happy to buy at bargain prices while they last.
The trouble is, most – if not all – CEOs and directors have little incentive to say the company is anything other than oversold. Find a corporate executive admitting he made a mistake and the best-case scenario is that he’s at a podium announcing his retirement.
More than likely, he’s sipping a daiquiri in St. Croix.
Yes, some stock buybacks are smart decisions made by good companies with good leadership. But some are just moves to boost EPS figures for the quarter – since, after all, if you can’t grow the E in “earnings per share,” you can always subtract the S via buybacks that take shares off the market. Other buybacks are merely meat for the PR grinder, where a company announces a plan to buy back billions of dollars of stock and then puts very little actual money toward the repurchase after the SEC filing.
Here are five big-name companies whose buybacks may never deliver any value to shareholders: AOL (NYSE:AOL), TiVo (NASDAQ:TIVO), Southwest Airlines (NYSE:LUV), Covidien (NYSE:COV), and Hewlett-Packard (NYSE:HPQ).
AOL announced on Aug. 11, after its share price hit the lowest value since the company was spun off from Time Warner in 2009, that it would begin a $250 million stock buyback program. The company has about 107 million shares on the market, so the program could potentially snap up about 19% of the outstanding AOL stock at current valuations.
I could be cruel and suggest that if CEO Tim Armstrong and his team wait a few weeks, until AOL hits, say, $10 a share, that $250 million will buy an even bigger percentage – and that if they wait a few more months for AOL to hit $9, it will go even farther than that. But let’s stay on topic here…
This buyback comes just a few months after the $315 million buyout of the Huffington Post and alongside a Wall Street Journal report that indicates the company is burning $160 million a year on Patch.com, it’s community news network.
Perhaps AOL is convinced that its investments will pay off, and that the $250 million buyback plan is a great strategic move as it retools for future growth. With $800 million in cash on its balance sheet, Armstrong could certainly execute this move in full without bleeding the coffers completely dry.
Of course, one has to be skeptical. As its legacy dialup internet access biz slowly fades into the ether and no new revenue streams have emerged, AOL could just be hoping to juice its EPS figure with a buyback.
AOL has been stuck in a steady downward spiral for years, and it seems hard to justify spending $250 million on window dressing for the balance sheet when clearly there are so many other issues in play.
TiVo was once one of those iconic brands, like Xerox or Kleenex or Band-Aid, that managed to connect so strongly with consumers that its name became the product. But TiVo has been struggling to find profitability recently and could be left behind amid the streaming video revolution.
The good news is that TiVo has zero debt and $200 million in cash on its balance sheet, so it has some time left on the clock to mount a comeback. Of course, the TiVo board just announced a filing that could burn up to half of that cash in a $100 million stock repurchase program over the next two years.
If the plan was meant to impress shareholders, it worked. From Thursday, Aug. 11, to Monday, Aug. 15, shares rallied about 16% due in part to the news.
But come on. TiVo will never dive into a buyback of that size. The company has 120 million shares outstanding, and at current valuations that would account for 10% of outstanding TiVo stock. What’s more, it would wipe out half of its piggybank at a time when the company has posted losses in 10 out of the last 11 quarters and is targeting another losing year in fiscal 2012.
TiVo had posted wider losses in recent quarters, lower revenue, higher costs and fewer subscribers. Yes, TiVo swung to a first-quarter profit for the first time in ages – but that was due to a recent legal settlement with Dish Network (NASDAQ:DISH) – and $500 million legal windfalls aren’t going to come around every quarter.
Yes, a buyback may improve EPS figures. Yes, there may be more cash to burn after the DISH settlement. But if shareholders think a stock repurchase is going to change those other ugly numbers, they should think again.