More than half of the 253 companies that bought back
at least 4 percent of their market cap recorded a negative
buyback effectiveness, indicating that managers generally time
Sorting all 253 companies by their volume of buybacks
as a percentage of market cap, the median buyback ROI was 5.5
percent for companies in the top half versus 9.5 percent for
those in the bottom half. Perhaps underscoring the challenge of
timing larger buyback volumes, the only company with buybacks
that exceeded half the value of their current market
capitalization was Safeway at 72.9 percent. Its buyback ROI was
negative 9.2 percent.
A typical company uses a hurdle rate of about ten
percent when examining new investments. Logically, buying back
shares should be held to the same standard. However, 115
companies had a higher buyback ROI and 138 were lower.
Comparing two-year aggregate buyback ROI though June
2012 to the two years ending in Q2 2010, a 4 percent increase
in buyback ROI trailed the stock market. Meantime, buyback
effectiveness slipped by about 10 percent.
Individual performances also produced some
surprises. Goldman Sachs has a reputation for the
shrewdest market judgment on Wall Street. Yet its $9.8 billion
produced a buyback ROI of negative 20 percent the
worst in class. Both Goldmans buyback strategy and
effectiveness were also negative.
A 115 percent internal rate of return secured first place
overall for Sunoco, where $313 million in buybacks outpaced
$131 million in dividends distributed over the same period.
These buybacks rode a generally rising share price
reflecting a strong buyback strategy. And effectiveness was
over 60 percent, an indication that management also executed
their buybacks with share prices generally below the prevailing
In dead last, on the other hand, was Netflix, with more than
half of its $257 million spent to repurchase stock vanishing.
Management bought back most of the shares during a run up in
their share price and then reduced buybacks when the shares
fell, landing the company in negative territory for both
strategy and effectiveness.
The studys authors concede that an element of luck is
involved here. Who, after all, can predict with certainty when
executing buybacks whether the price will go up or down? But
market volatility also affects other investments on which
shareholders judge managers, including capital investments,
R&D pipelines and acquisitions. Ultimately what
matters is the return on your buyback. Its no different
from returns on other assets, says Fortuna CEO Greg
Yet investors often wont hear about returns on
repurchases from companies that spend lavish sums on them.
Take, for example, seventh place Biogen Idec, a global
biotechnology company. Readers who search its latest 10K for
comment on buybacks will find that Biogen Idec paid $2.6
billion to repurchase 40.3 million shares in 2010 and 6 million
shares in 2011 under authorization in February 2011 to
repurchase up to 20 million more shares. But any measure of
return is left for investors to calculate.
Ingersoll Rand, an Ireland-based multinational that competes
in the worldwide market for products and systems that protect
property and air quality, garnered 16th place overall and first
place in the capital goods sector after spending $1.2 billion
to repurchase shares. That price tag was the largest single
line item on Ingersolls 2011 statement of cash flows,
nearly twice the next biggest item, $646 million for a
loss on sale/asset impairment, and just under five
times capital expenditures. Nevertheless, its 10K reports
authorization by the board to repurchase 2 billion shares
without further comment as if the merits of a massive
buyback are self-evident.
In some cases, managers may be padding their own pockets
through ill-timed buybacks. In a paper entitled Insider
Trading via the Corporation and published last August,
Harvard Law Professor Jesse Fried cited overwhelming
evidence that insiders use private information to have firms
secretly buy and sell their own shares at favorable prices. The
volume of such indirect insider trading likely totals tens or
hundreds of billions of dollars per year. The upshot?
On average, public investors lose, and insiders
systematically profit to the tune of several billion
dollars per year, Fried wrote.
Whatever the explanation for ill-timed stock repurchases,
investors now have a tool with which to hold executives
feet to the fire over their decisions.