by Ed Elfenbein | July 24, 2012 8:46 am
As regular readers of this blog know, I’m not a fan of share buybacks. I’d prefer that companies pass along the profits to me in the form of dividends.
I realize, of course, there are different tax implications so I also wish the tax code were neutral on this issue. I also think that too many companies use share buybacks to mask the generous stock option grants that are given to senior management.
Now there’s another reason to disfavor share buybacks, they don’t work:
In a report released today, Credit Suisse (NYSE:CS) analyzed $2.7 trillion worth of stock buybacks by companies in the Standard & Poor’s 500 Index between 2004 and 2011. The conclusion: “it looks like most of the buybacks for the S&P 500 over the past eight years have not yet added much value for the remaining shareholders.”
The study, first reported by CNBC’s Herb Greenberg, found many buybacks are done for the wrong reasons. Many companies initiate buybacks because they’re offsetting the dilution from executive compensation that awards stock grants or options. In other cases, they’re simply looking to deploy excess cash or boost earnings per share results.
“The problem for many companies is bad timing, instead of buy low sell high, it appears share buybacks ramp up when things are going well and stock prices are higher . . . and are dialed down when times are tough and stock prices are lower,” Credit Suisse analyst David Zion writes in the report.
Companies, of course, ought to be doing the opposite — buying their shares when the price falls below the stock’s intrinsic value. If companies were really focused on returning value to shareholders, the amount of buybacks would trail the amount of dividends, which puts cash directly in the hands of shareholders.
Instead, Credit Suisse found the $2.7 trillion in buybacks overshadowed the $1.8 trillion in dividends paid over the same time.
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