Tag Archives: Share buybacks

Buffett On Buybacks, by Lance Roberts

Posted on March 11, 2023 | Leave a comment

There is a right and a wrong way to do buybacks. From Lance Roberts at realinvestmentadvice.com:

Warren Buffett defended stock buybacks in Berkshire Hathaway’s annual letter, pushing back on those railing against the practice he believes benefits all shareholders.

“When you are told that all repurchases are harmful to shareholders or to the country, or particularly beneficial to CEOs, you are listening to either an economic illiterate or a silver-tongued demagogue (characters that are not mutually exclusive).”

The media latched on to this quote with both hands, apparently not taking the time to read what Warren Buffett actually wrote in his annual letter. (Emphasis mine.)

“The math isn’t complicated: When the share count goes down, your interest in our many businesses goes up. Every small bit helps if repurchases are made at value-accretive prices.

Just as surely, when a company overpays for repurchases, the continuing shareholders lose. At such times, gains flow only to the selling shareholders and to the friendly, but expensive, investment banker who recommended the foolish purchases.

Gains from value-accretive repurchases, it should be emphasized, benefit all owners – in every respect.”

Mr. Buffett is correct that if repurchases are done at a “value-accretive” price, they can benefit all shareholders by increasing the size of their ownership in the company. Unlike the mainstream narrative, this is NOT a “return of capital to shareholders,” but just the opposite of a shareholder dilution.

Unfortunately, while the mainstream media quickly jumped on those opposed to share repurchases, their lack of reading what Mr. Buffett stated is critically important to what is happening in the financial markets today.

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Top 10 Share-Buyback Queens – Big Tech except Intel, Big Banks except Wells Fargo, Buffett – Incinerate Most Cash Ever in Q2. The Rest Lags, by Wolf Richter

Posted on September 26, 2021 | Leave a comment

Buffet is probably trustworthy buying back Berkshire stock. The company has a mountain of cash so it’s not borrowing. Buffet is an excellent judge of value, and presumably that extends to the value of his own company. The rest of the buyback queens, make sure you check under the hood, especially if the company is borrowing money for its buybacks. From Wolf Richter at wolfstreet.com:

Funded by Debt: Since 2012, share buybacks totaled $5.5 trillion, corporate debt soared by $4.7 trillion.

They’re back big time. Three of the big four banks are back – while Wells Fargo keeps getting slapped on the wrist – after all four were out of it last year due to pandemic-rated financial restrictions. Intel fell out of it. But the rest of Big Tech is in, and Apple bigger than ever. Warren Buffett’s Berkshire Hathaway, after rightfully dissing share buybacks for years, has become one of the largest share buyback queens. And Charter Communications has jumped into it massively.

The top 10 companies – ranked by their cumulative buybacks over the past five years – bought back more of their shares than ever in Q2: $85 billion, according to S&P Dow Jones Indices this week, accounting for 43% of the total share buybacks by all S&P 500 companies. Since 2014, these 10 companies bought back $1.13 trillion of their own shares.

The two surges in the chart below – first after the corporate tax cuts in 2017, and second after Q2 2020 – quadrupled the quarterly rate of share buybacks for these 10 companies from around $20 billion a quarter in the four years through 2017, to $85 billion in Q2 (data via YCharts.com):

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Estimates About the Collapse of Share Buybacks Emerge, by Wolf Richter

Posted on March 31, 2020 | 1 comment

Corporate share buybacks support stock prices, and the value of executive stock options, often with borrowed money, and its all legal! This shell game may be coming to an end. From Wolf Richter at wolfstreet.com:

“The leveraged share buyback game has ended, which also means an end to the phony earnings growth.”

HSBC and Goldman Sachs have now both come out with estimates about the extent of the collapse of share buybacks. So far into this crash, over 50 companies have suspended share buybacks, accounting for $190 billion in cash that is not flowing into the stock market, representing over a quarter of total share buybacks in 2019.

HSBC estimates that over the next two quarters, share buybacks in the US could be cut by $300 billion, meaning $300 billion in “lost inflows” into the stock market.

And more cuts are coming. A note by Goldman Sachs analysts, reported by Bloomberg, added: “Reduced cash flows and select restrictions mandated as part of the Phase 3 fiscal legislation suggest more suspensions are likely.”

And slashing share buybacks would have an impact on stocks, the Goldman analysts said: “Higher volatility and lower equity valuations are among the likely consequences of reduced buybacks.”

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After Blowing $43 Bn on Share-Buybacks in 6 Years, Boeing Scrambles to Borrow $10 Bn, on Top of a $9.5 Bn Credit Line in Oct, to Fund its 737 MAX Fiasco, by Wolf Richter

Posted on January 21, 2020 | 1 comment

Boeing wouldn’t be in the fix it’s in if it had spent more money on plane design and less on share buybacks. From Wolf Richter at wolfstreet.com:

Having become a master of financial engineering instead of aircraft engineering.

The first thing to know about Boeing’s mad scramble to line up “$10 billion or more” in new funding via a loan from a consortium of banks, on top of the $9.5 billion credit-line it obtained in October last year – efforts to somehow get through its cash-flow nightmare caused by the 737 MAX fiasco – is that the company blew, wasted, and incinerated $43.4 billion to buy back its own shares since June 2013, having become a master of financial engineering instead of aircraft engineering.

If Boeing had focused on its business – such as designing a new plane instead of doctoring an ancient design to save money and time – and if it hadn’t blown $43 billion on share-buybacks but had invested this money in a new design, those two crashes wouldn’t have occurred, and it wouldn’t have to beg for cash now. The chart below shows the cumulative share-buybacks in billions of dollars since Q1 2009. In Q2 2019, it belatedly halted the share buybacks (share buyback data from YCharts):

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Apple Lost $11 Billion Buying Back Its Own Stock In 2018, by Tyler Durden

Posted on December 28, 2018 | Leave a comment

At least Apple used its own money to speculate on its stock. A lot of companies borrow money to buy their own stock. Like Apple, many of them have bought stock are prices far higher than current prices. From Tyler Durden at zerohedge.com:

There’s a funny thing about buybacks: when stocks are rising (and are therefore more expensive), companies have zero doubts  about repurchasing their own stock, especially if said purchase is funded with cheap debt. Of course, by repurchasing their stock, the price goes even higher making management’s equity-linked comp more valuable, which explains why management teams usually have no misgivings about allocating capital to this most simplistic of corporate uses of funds. However, when stocks fall, companies tend to clam down on buybacks due to fears that the drop may continue, forcing the CFO or Treasurer to explain his actions to the CEO or the board, and why they risked losses on capital (as well as getting a pink slip) instead of investing in “safer” corporate strategies like M&A, R&D or capex.

The irony, of course, is that companies should not be buying back stocks when the stock is rising (as that’s when it is more expensive), and accelerate repurchases when it is dumping. And yet, that virtually never happens in reality as management teams, like most investors and algos, tend to chase momentum and direction. Meanwhile, confused by underlying pricing mechanics, management – which is singlehandedly responsible for the levitation in the stock price with its buybacks – then watches its stock price tumble even more one stock repurchases are halted.

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Is All Lost? Record Share Buybacks But Stocks Get Crushed, by Wolf Richter

Posted on December 18, 2018 | Leave a comment

One thing that happens when stocks go into bear markets and the economy heads south is that practices that were overlooked when rising markets were lifting all boats get intense scrutiny. If the current downtrend continues, count on Congressional hearings on share buybacks, especially those funded with debt. From Wolf Richter at wolfstreet.com:

The vengeance of share buybacks: buyback queen Apple plunges.

In the third quarter, share buybacks by S&P 500 companies totaled $203.8 billion, according to S&P Dow Jones Indices today. These are actual buybacks, not hyperventilated announcements of possible future share buybacks:

  • Share buybacks in Q3 jumped 57.7% from a year earlier.
  • This was the third quarter in a row of record share buybacks.
  • For the first three quarters this year, buybacks totaled a mind-bending $583 billion.
  • This $583 billion was up 34% from the same period in 2017.
  • This $583 billion was within a hair of beating the full-year all-time record of $589 billion set in 2007 before it all collapsed.
  • Since Q1 2012 — in less than seven years — all share buybacks combined totaled an even more mind-bending $3.54 trillion.

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General Motors And General Electric Were Both Victimized By The Same Ponzi Scheme, And They Are Both Telling Us The U.S. Economy Is In HUGE Trouble, by Michael Snyder

Posted on November 28, 2018 | Leave a comment

Are GM’s and GE’s troubles unique to those companies, or are there indicating trouble for the US economy? From Michael Snyder at theeconomiccollapseblog.com:

America’s twin economic “generals” are both in very deep trouble.  General Electric was founded in 1892, and it was once one of the most powerful corporations on the entire planet.  But now it is drowning in so much debt that it may be forced into bankruptcy.  General Motors was founded in 1908, and at one time it was the largest automaker that the world had ever seen.  But now it is closing a bunch of factories and laying off approximately 14,000 workers as it anticipates disappointing sales and a slowing economy.  If the U.S. economy really was “booming”, both of these companies would probably be thriving.  But as you will see below, both of them have been victimized by the exact same Ponzi scheme, and both firms are sending us very clear signals that the U.S. economy is heading for troubled waters.

Whenever you hear the word “restructuring”, that is always a sign that things are not going well for a company.

And it turns out that GM’s “restructuring” is actually going to cost the firm 3.8 billion dollars…

General Motors said Monday it plans to effectively halt production at a number of plants in the U.S. and Canada next year and cut more than 14,000 jobs in a massive restructuring that will cost up to $3.8 billion.

Of course GM doesn’t have 3.8 billion dollars just lying around, and so they are actually going to have to borrow money in order to close these plants and lay off these workers.

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Corporate Share Buybacks Looking Dumber By The Day, by John Rubino

Posted on November 26, 2018 | Leave a comment

Somehow this is legal: stock-option laden managements authorize their corporations to buy back shares, often with borrowed money, thus theoretically supporting the share price and enriching management. It doesn’t always work out, especially when the stock market goes down. From John Rubino at dollarcollapse.com:

A recent MarketWatch article notes that:

GE was one of Wall Street’s major share buyback operators between 2015 and 2017; it repurchased $40 billion of shares at prices between $20 and $32. The share price is now $8.60, so the company has liquidated between $23 billion and $29 billion of its shareholders’ money on this utterly futile activity alone. Since the highest net income recorded by the company during those years was $8.8 billion in 2016, with 2015 and 2017 recording a loss, it has managed to lose more on its share repurchases during those three years than it made in operations, by a substantial margin.

Even more important, GE has now left itself with minus $48 billion in tangible net worth at Sept. 30, with actual genuine tangible debt of close to $100 billion. As the new CEO Larry Culp told CNBC last Monday: “We have no higher priority right now than bringing those leverage levels down.” The following day, GE announced the sale of 15% of its oil services arm Baker Hughes, for a round $4 billion.

Of course, since that sale values Baker Hughes at $26 billion, and GE paid $32 billion for 62% of Baker Hughes as recently as last year, which looks to me like a valuation for the whole company of $52 billion, GE shareholders appears to have lost half the value of their investment in Baker Hughes in about 18 months.

But GE is just one of several hundred big companies with CEOs who now have to justify a massive, in some cases catastrophic waste of shareholder cash.

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Where the Heck are Share Buybacks in This Rotten Market? by Wolf Richter

Posted on November 2, 2018 | Leave a comment

The old share-buyback black magic doesn’t appear to be working anymore. From Wolf Richter at wolfstreet.com:

The myth of the “blackout period.” And the price of “unlocking value.”

Share buybacks weren’t happening today. Shares fell, after three days of rallying that followed the worst October since 2008, which had wiped out $4 trillion in overvalued market capitalization in the US, Europe, and Asia.

Shares fell today in part because Apple [AAPL], the giant in the indices, gave iffy guidance for the holidays Thursday evening; and with product sales not going anywhere, and only price increases boosting revenues, it said it would no longer disclose unit sales. This combo worked like a charm, and shares dropped 6.6%.

So where are the corporate share buybacks when you need them? This is when companies buy back their own shares in order to prop up their price and thereby the overall market. Where is this panacea that was considered securities fraud until 1982?

Throughout October, Wall Street gurus promised that shares would rise as soon as companies emerged from their “blackout” period that prevents them from buying back their shares.

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SEC Frets about Share Buybacks, “Torrent of Corporate Trading Dominating the Market,” and “Short-Term Financial Engineering” by Wolf Richter

Posted on June 11, 2018 | Leave a comment

If share buybacks are supposed to be for the long-term benefit of the company, why do so many corporate insiders sell right after share buyback announcements lift the price of the stock? From Wolf Richter at wolfstreet.com:

“Right after the company tells the market the stock is cheap, executives overwhelmingly decide to sell.”

A study by the SEC of 385 recent share-buyback announcements — this is when companies announce how much money they will spend in the future on buying back their own shares, but before they actually begin buying them — found:

  • Share-buyback announcements led to “abnormal returns” in the share price over the next 30 days.
  • Executives used this share price surge to cash out.

“In fact, twice as many companies have insiders selling in the eight days after a buyback announcement as sell on an ordinary day. So right after the company tells the market that the stock is cheap, executives overwhelmingly decide to sell,” explained SEC Commissioner Robert Jackson Jr. – appointed by President Trump and sworn in earlier this year – in a speech today. He went on:

And, in the process, executives take a lot of cash off the table. On average, in the days before a buyback announcement, executives trade in relatively small amounts—less than $100,000 worth. But during the eight days following a buyback announcement, executives on average sell more than $500,000 worth of stock each day—a fivefold increase. Thus, executives personally capture the benefit of the short-term stock-price pop created by the buyback announcement:

“This trading is not necessarily illegal,” he added. “But it is troubling, because it is yet another piece of evidence that executives are spending more time on short-term stock trading than long-term value creation.”

The surge in buybacks is largely due to the new corporate tax law. In the first quarter, companies actually repurchased an all-time-record $178 billion of their own shares. In terms of announcements of future share buybacks, May set an all-time record of $174 billion – in just one month! So this business is heating up.

To continue reading: SEC Frets about Share Buybacks, “Torrent of Corporate Trading Dominating the Market,” and “Short-Term Financial Engineering”

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