Nomura Securities analyst Bill Carcache recently produced a report that studies share repurchases for many of the major banks dating all the way back to 1999. Interestingly for investors, Carcache found that some banks did much better than others.
Wells Fargo (WFC), for instance, did the best of any bank delivering an internal rate of return of 10.1%. WFCs share repurchases since 1999 cost the company $39.9 billion but today are worth $69.5 billion — great news for shareholders.
But there is an unintended consequence of these share repurchases. Care to guess what that is?
Share repurchases often (but not always) reduce a company’s overall share count, which in turn reduces the dollar amount of dividends paid out. In the case of Wells Fargo it saved paying out $9.1 billion in dividends as a result of its buyback program. Unfortunately, despite the $70 billion investment, WFC investors saw its share count between 2008 and 2014 increase by 58% thanks to several common stock offerings used to repay the US Treasury’s TARP investment in WFC.
So, not only did WFC shareholders receive $9.1 billion less in dividends as a result of these share repurchases, but they’ve also seen its share count increase dramatically which is exactly the opposite result they were looking for in the first place.
Carcache’s research has me wondering how much other S&P 500 companies save in terms of dividends paid out as a result of share repurchases. Selecting three companies from three different sectors of the S&P 500 Buyback Index, I’ll examine the unintended shareholder consequences over the past five years.