by Jeff Reeves | March 29, 2012 11:49 am
Standard & Poor’s recently reported that stock buybacks are finally on the decline after almost three years of increases. Stock buybacks are a fairly common way for companies to return wealth to their shareholders. Although not as tangible as dividends, which get mailed directly to anyone owning the stock, the mechanics of a share buyback also can provide shareholder value and give shares a boost.
Consider that while Apple (NASDAQ:AAPL) made waves with the announcement of a long-awaited dividend, at $2.65 a share, the tech giant also committed $10 billion toward stock buybacks at the same time. There’s a reason the company made these two big announcements hand-in-hand.
The concept of a buyback is simple: If there are 100 equal shareholders in a $100 million company, each owns a 1% stake, or $1 million. But if the corporation decides to “invest in itself” and buy back the ownership stake of 10 people, the remaining 90 shareholders now own a bigger part of the company — a $1.1 million stake instead of a $1 million stake, presuming the value is constant.
In short, fewer shareholders means the remaining folks owning stock have a bigger piece of the pie — that theoretically is worth more.
Another benefit is that as the relative ownership stake of each investor increases, the earnings per share naturally increase, too, because there are fewer shares outstanding.
Let’s say a company has 1 million shares outstanding and has net income of $1 million. Simple math says earnings per share total $1. But if the company buys back 100,000 shares, the EPS increase simply by virtue of the math — $1 million in profits divided by 900,000 shares gives us $1.11. Earnings per share “increase” like magic this way to the tune of 11% despite no real movement in total net income.
There obviously is a risk here that the “fuzzy math” of buybacks isn’t really growth. Wall Street is smart enough to figure out these games eventually, and a company can’t mask underperformance forever merely through repurchases that juice EPS numbers.
Also, there’s the very real cost of buybacks. Stock repurchases aren’t cheap, and if a company spends billions of dollars out of optimism in current operations, it might take away from funds for research, acquisitions or other equally compelling investment opportunities.
On the whole, however, many investors see buybacks as a very positive sign. If you’re in this camp, then here are 17 companies with the biggest buyback programs on Wall Street — averaging $2 billion or more spent on stock repurchases over the past seven years.
Of course, some of those buyback plans didn’t necessarily result in market-beating returns — and some of these companies have either increased or decreased their pace as of late. Here’s a more in-depth look at buybacks and performance for these top stocks:
InvestorPlace contributor Ivan Martchev wrote a great post this week pointing out how since 1998, Autozone (NYSE:AZO) has repurchased a whopping 128.8 million shares — three times the current number of total shares outstanding! He then went on to highlight some of the other massive stock buyback plans in recent memory.
But as this table shows, sometimes buybacks fail to pack a punch. Although the vast majority of these stocks have outperformed, it’s worth noting that Oracle, Travelers and Goldman underperformed in 2011 despite big money dedicated to repurchases. And in Goldman’s case, the underperformance is pretty darn ugly.
The same holds true in the long term, with Intel, Amgen, Time Warner and Pfizer all lagging the market during the past seven years despite a minimum of $26 billion spent on repurchases in that period!
So while it’s certainly a plus for a company to be repurchasing shares, it also pays to look beyond just the cash spent on stock buybacks.
Jeff Reeves is the editor of InvestorPlace.com, and the author of “The Frugal Investor’s Guide to Finding Great Stocks.” Write him at editor@investorplace?.com or follow him on Twitter via @JeffReevesIP. As of this writing, Jeff did not hold a position in any of the aforementioned securities.
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