As InvestorPlace editor Jeff Reeves recently pointed out, 17 U.S companies have spent more than $2 billion per year repurchasing their shares since 2004. This shareholder largesse adds up to a cumulative $722.8 billion. Heading the list is Exxon Mobil (NYSE:XOM), which repurchased $170.2 billion during this seven-year period.
The staggering amounts got me to thinking about what could be hidden in the friendly confines of a massive stock buyback. The most obvious answer is “excessive executive and director compensation.” Many companies use stock repurchases to ensure the share count doesn’t rise noticeably over time.
The problem for investors becomes one of optics: Are such companies simply trying to make things right by shareholders, or are they covering up something more sinister. The answer can be tough to fathom and not so simple. Read on, and I’ll explain why.
Take Exxon Mobil. In the seven years during which it repurchased that $170.2 billion in shares, it has reduced its share count by 27% to 4.87 billion. In the most recent three years, it has repurchased $22.1 billion of its stock while simultaneously issuing $924 million.
In Exxon’s 2011 10-K, it mentions that its commitment to reducing its share count began in earnest in August 2000, when it announced it was resuming share repurchases in an effort to “offset shares issued in conjunction with company benefit plans and programs and to gradually reduce the number of shares outstanding.” These dual purposes can work together. Therefore, it’s pretty clear that Exxon isn’t trying to cover up CEO Rex Tillerson’s $90 million in pay over the past three years with its share repurchases. Not by a long shot.
To be guilty of disguising the dilutive nature of stock and option awards, two things usually must exist: First, executive compensation must be excessive; and second, the share repurchases don’t significantly reduce the share count. According to a report on CEO compensation by Equilar for The New York Times, the median pay for the 100 top-paid CEOs in America is $14.4 million. For our purposes here, in order to qualify as excessive, a CEO’s pay must be 20% higher, or a minimum of $17.3 million. As for share count, I’ll look at the past five years to the end of 2011. Remember we’re looking for just a dent in the share count, not a huge decline.
Walt Disney (NYSE:DIS)
Disney CEO Bob Iger was paid $31.4 million in 2011. Disney’s share count in the past five fiscal years dropped by just 8.9% from 2.08 billion to 1.91 billion despite repurchasing $19.3 billion in stock. At the same time, it received $4.3 billion for the exercise of options. The only problem with this picture is it likely paid far more for the shares it repurchased than what it received for the shares issued on the exercise of options. This isn’t a blatant attempt to hide the compensation, but it’s clear that Disney is paying a price for all the options granted.
Abbott Labs (NYSE:ABT)
CEO Miles White’s 2011 compensation was $24 million in 2011. In the past five years, Abbott has repurchased $3.9 billion of its stock while receiving $4.06 billion for the exercise of options. Not by coincidence, its share count has remained constant at 1.56 billion.
Abbott’s stock since White became CEO in 1999 has achieved good results, averaging an annual total return of 4.7%, better than most of its peers. It appears that Abbott’s anti-dilutive share repurchase program worked like a charm.
Honeywell International (NYSE:HON)
According to Equilar, Honeywell’s CEO David Cote received $35.3 million in total compensation in 2011, with 66% of that in the form of a cash bonus, unaffected by options. However, Cote’s take-home pay, which includes options and grants that vested in 2011, was actually a much higher $55.8 million, with 54% of that in stock and option awards.
In terms of replacing these options, it appears Honeywell didn’t have a plan in place until last year, when it repurchased $1.1 billion of its stock after taking a pass the two previous years while its shares were much cheaper. Although Honeywell readily admits it makes repurchases to offset the dilutive nature of stock-based compensation, you would think it could at least attempt to get a decent price for its stock.
Oracle’s situation is interesting. Larry Ellison founded the company in 1977, has been its CEO since the beginning and is its largest shareholder. He received $1 in salary in fiscal 2011, which isn’t uncommon for founder/leaders. However, while his announced compensation seems high at $77.6 million, his actual take-home pay was a paltry $14.9 million, with almost all of it in cash.
However, when President Mark Hurd — who you might remember from Hewlett-Packard (NYSE:HPQ) — joined Oracle, he was given a stock option to purchase 10 million shares at $24.14, with 25% vesting each year until September 8, 2014. At its current share price, that works out to about $12 million per year in compensation. Since the beginning of 2007, Oracle has issued 473 million shares for shareholder compensation and reduced its share count by just 3% or 160 million. Oracle is definitely using share repurchases exclusively as an anti-dilutive measure, in my opinion.
Right there in Ford’s 2011 10-K it states, “During 2012, we intend to implement a modest anti-dilutive share repurchase plan to offset share-based compensation.” Obviously, while it’s been rebuilding its business the past few years, share repurchases were out of the question. Now that its financial survival is a certainty, the board has decided to buy back some of the stock it granted to Alan Mulally & Co.
In 2011, Mulally’s total compensation was $29.5 million, while his take-home pay was $68.2 million due to stock and option gains. Since 2006, Ford’s share count has gone from 1.9 billion shares to 4.1 billion, and although executive compensation is just part of the reason for that (Ford had big share offerings in 2009 and 2010), that’s a whole bunch of shares to recover. At current prices, it would take in the range of $22 billion or more. In coming quarters, it will be interesting to see whether Ford chooses to attack the entire problem or just the dilution due to executive compensation. My bet is it settles for the latter and hangs on to its cash.
At a time when U.S. executives are paid 343 times the median pay of the country’s workers, it’s easy to conclude that large corporations use share repurchases to cover up the excessive compensation of its executives. However, in four of the five examples, it’s impossible to detect whether these companies made share repurchases for any other reason than they had excess cash and no better alternatives for its allocation. In Abbott’s case is clearly one where it’s repurchasing shares solely as an anti-dilutive measure to protect shareholders.
Companies repurchase shares for all sorts of reasons. In the end, I’m afraid, there is no smoking gun.
As of this writing, Will Ashworth did not own a position in any of the stocks named here.