Share buybacks 'looting the future'

[DividendDragon]

Read this extremely intersting article today

http://www.ft.com/cms/s/0/1aaac576-e9bb-...z3YW79rYvM

Are companies now simply 'manufacturing' high share prices and EPS growth by share buybacks?

This certainly seems to be the case in IBM.

[Kerim]

I don't have the heart to register for another site at the moment, so I can't read the article. But based just on the headline, I'd say that yes, it is very important not to confuse EPS numbers that increase due to buybacks with EPS numbers that increase due to increasing revenue and profits. But in my opinion, while I'd always prefer increasing revenues and profits, increasing EPS through aggressive buybacks is not "fake" or negative. Only a profitable company can do this, and I think it is naive when people say that the company should just reinvest that money in the business. This is not always possible or prudent. Returning cash to shareholders through buybacks provides important discipline and does result in real EPS growth.

[Roadmap2Retire]

Cant read FT articles (sign up for 3 free article per month? Puh-lease!)

There are some buybacks which make sense...companies like Apple have been very smart about raising debt in the current environment (issuing bonds with almost next to nothing yields) and in EU no-less, which I thought was a great move. But for the most part, companies are simply resorting to buybacks to line the management's pockets. Its short term thinking that achieves nothing more than stock price gain and cashing out for execs who arent doing their jobs properly. If the company is really flush with cash, and there are absolutely no investing opportunities, why not issue special dividends? Granted that some amount of buyback is good for the company overall, but the pace and the fever pitch it has reached is insane imo, which has resulted in the indexes reaching all-time highs. Besides, history has shown that companies seldom announce and perform share buybacks when stock prices are cheap.

Here's a video from HBR that illustrates the point well.
https://hbr.org/video/4102770682001/the-...k-buybacks

So, the question you should be asking is: if the company is buying its own stock and execs/insiders are selling, should you be buying?

[Kerim]

(04-27-2015, 09:14 AM)Roadmap2Retire Wrote: Here's a video from HBR that illustrates the point well.
https://hbr.org/video/4102770682001/the-...k-buybacks

Hmmmmmmmmmmmmmm. There are certainly some interesting points in the video, but overall seems like really really reckless and biased. It seems to take as an underlying assumption that companies have a duty to do more than generate profits for shareholders. There can and should be reasoned discussion and argument about whether this is (or should be) the case, but that video is hardly taking an objective look at the question.

(04-27-2015, 09:14 AM)Roadmap2Retire Wrote: So, the question you should be asking is: if the company is buying its own stock and execs/insiders are selling, should you be buying?

There is a lot of truth to the old saw that there are many reasons that insiders sell stock, and most of them tell you little about the performance of the company.

[Roadmap2Retire]

(04-27-2015, 09:44 AM)Kerim Wrote:

(04-27-2015, 09:14 AM)Roadmap2Retire Wrote: Here's a video from HBR that illustrates the point well.
https://hbr.org/video/4102770682001/the-...k-buybacks

Hmmmmmmmmmmmmmm. There are certainly some interesting points in the video, but overall seems like really really reckless and biased. It seems to take as an underlying assumption that companies have a duty to do more than generate profits for shareholders. There can and should be reasoned discussion and argument about whether this is (or should be) the case, but that video is hardly taking an objective look at the question.

Granted that the video is a bit biased considering its a short video. But when the consensus from everyone else is that "buybacks are good", its good to have an opposing viewpoint.

Quote:

(04-27-2015, 09:14 AM)Roadmap2Retire Wrote: So, the question you should be asking is: if the company is buying its own stock and execs/insiders are selling, should you be buying?

There is a lot of truth to the old saw that there are many reasons that insiders sell stock, and most of them tell you little about the performance of the company.

Most executives are compensated via stock options (with cash compensation just a small part of the whole package). Exercising those options is pretty much the norm. The underlying problem is that the decisions are taken by the board to authorize these buybacks instead of thinking long term.

[crimsonghost747]

Well yes a lot of companies are, in my opinion, spending too much on buybacks. But I don't consider it to be "manufacturing" or "artificially raising" the EPS. There is a simple logic behind it: even if earnings don't grow the pie is being split into fewer pieces. Then there is more for me. And in the end that is what I'm after.

I am a firm believer that buybacks are great if three things happen.
1. the management cannot find any smart investments to make
2. the company doesn't have too much debt
3. the current share price is not overvalued

Also keep in mind that most bigger companies would see their shares get diluted constantly (due to employee benefits, executive compensation etc) unless they were buying back shares. In these situations small share buybacks are pretty much necessary in order to keep the # of outstanding shares stable. (or preferably declining)