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Couple of interesting reads on the buyback binge. I still remain critical of companies that spend more on buybacks instead of increased or special dividends or invest back into the business.
http://wolfstreet.com/2016/03/21/share-b...urn-toxic/
http://ophirgottlieb.tumblr.com/post/141...ck-and-the
Btw, we enter a buyback blackout period starting today...so, some good buying opportunities should be coming up in the coming weeks.
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I really wrestle with this. Sometimes I can almost be convinced that buybacks are evil from a national economic perspective, but not quite. I am fairly convinced that companies often time their buybacks poorly, and that is a shame, but it does not convince me that buyback are bad in theory. Would I rather just get a larger dividend? Probably. But I understand and appreciate that buybacks preserve the company's flexibility in a way that increasing the dividend does not.
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I agree with you Kerim, imagine Google for example, if they go down the dividends lane, they will be expected to keep paying those dividends, and increasing them every year, from now, until the end of times. It's a really long term commitment.
Now a buyback? It can be stopped anytime. Increased or decreased, no questions asked, there are no expectations from the street or the shareholders (apart from growing EPS).
The real question is the timing. Is now the right time to do it?
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I enjoy buybacks IF that results in the total amount of outstanding shares decreasing considerably over time. I mean, that is the whole point isn't it? If this is not accomplished then all the cash that went into buybacks was basically just used to pay things like executive compensation etc.
So when buybacks actually result in me owning more of the company than I did before then I see it as a good thing, and while I still prefer my dividend I certainly do not mind a certain amount of money being used regularly to reduce the overall sharecount. I do not have the luxury of a tax-sheltered account so buybacks, if executed correctly, bring more value to me than reinvesting dividends.
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(03-21-2016, 12:31 PM)Rasec Wrote: I agree with you Kerim, imagine Google for example, if they go down the dividends lane, they will be expected to keep paying those dividends, and increasing them every year, from now, until the end of times. It's a really long term commitment.
This is for the companies following the American style of increased dividend payments. Nothing is stopping a company, for example Google as you used in your example, to adopt a system similar to what a lot of European companies use. The dividend policy doesn't have to be "ok $1.00 this year and steady increases of 5% per year", it can be something like:
"The objective of the Board of Directors is that, in the long term, the dividend should be equivalent to 33–50 percent of income after standard tax, but always taking into account the company's long-term financing requirements."
That is a direct quote from one company that I've set my eyes on. And surprise surprise, even with this model it's possible to have a pretty steady stream of increasing dividends (which this company has done, though there have been years with no increases in div. payments) as long as the EPS keeps going up, which is what we want anyway. As you can see they have a 15 percentage point zone to move in so they can easily adjust their payments in the best interest of the company. (which, in the long run, will be the best interest of the shareholders too)
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I may be in the minority here, but I love buybacks if the outstanding shares are coming down, with some caveats. When a company is undervalued, buybacks may be the best use of their cash. If a company is overvalued, then why not issue some shares to raise cash? Dividends and dividend growth is #1, but I've watched 20% of DPS's outstanding shares disappear in just a few years. I love it.
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03-22-2016, 01:26 PM
(This post was last modified: 03-22-2016, 01:30 PM by Roadmap2Retire.)
Some good discussion, but here are my counter arguments.
* The board & management authorizing the buybacks are not necessarily the sharpest tools in the shed. They are almost always terrible market timers. Companies buy when the stock is expensive and terminate buybacks when the rough times come around. There have been plenty of studies completed and this has been proven time and again - buybacks peaked just before the financial crisis in 2007/2008 and were terminated by most going into 2008/2009 (when they should've been buying). Same goes for the current collapse in energy. Companies like Exxon & Chevron (and countless other O&G companies) were spending cash like no tomorrow on buybacks before 2014. After the oil prices and the share prices crashed -- when the share price was finally cheap -- these companies terminated their buybacks. We tend to forget that behind these companies are humans with emotions just like anyone else and follow the fallacies that most people suffer from.
* If share prices are really reduced, then a case can be made for the buyback program, since the rest of us shareholders get a bigger piece of the pie. But the reality is that a lot of companies dilute regularly in order to pay the employees and management. Case in point, Qualcomm, which has been aggressively buying back their stock over the course of years. But if you look at the sharecount, it hasnt done much. In fact, the number of shares increased in 2011, 2012 and 2013 and barely moved the needle in 2014 -- while the record amount of buybacks were announced & executed. One might argue that without the buybacks, the sharecount would just balloon, but the original justification for the dilution is that the company will keep it under control with buybacks.
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(03-22-2016, 01:26 PM)Roadmap2Retire Wrote: Some good discussion, but here are my counter arguments.
* The board & management authorizing the buybacks are not necessarily the sharpest tools in the shed. They are almost always terrible market timers. Companies buy when the stock is expensive and terminate buybacks when the rough times come around. There have been plenty of studies completed and this has been proven time and again - buybacks peaked just before the financial crisis in 2007/2008 and were terminated by most going into 2008/2009 (when they should've been buying). Same goes for the current collapse in energy. Companies like Exxon & Chevron (and countless other O&G companies) were spending cash like no tomorrow on buybacks before 2014. After the oil prices and the share prices crashed -- when the share price was finally cheap -- these companies terminated their buybacks. We tend to forget that behind these companies are humans with emotions just like anyone else and follow the fallacies that most people suffer from.
* If share prices are really reduced, then a case can be made for the buyback program, since the rest of us shareholders get a bigger piece of the pie. But the reality is that a lot of companies dilute regularly in order to pay the employees and management. Case in point, Qualcomm, which has been aggressively buying back their stock over the course of years. But if you look at the sharecount, it hasnt done much. In fact, the number of shares increased in 2011, 2012 and 2013 and barely moved the needle in 2014 -- while the record amount of buybacks were announced & executed. One might argue that without the buybacks, the sharecount would just balloon, but the original justification for the dilution is that the company will keep it under control with buybacks.
One could argue it's an important way (specially in the tech world) to attract the talent a company needs in order to grow and succeed.
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(03-22-2016, 02:02 PM)Rasec Wrote: (03-22-2016, 01:26 PM)Roadmap2Retire Wrote: Some good discussion, but here are my counter arguments.
* The board & management authorizing the buybacks are not necessarily the sharpest tools in the shed. They are almost always terrible market timers. Companies buy when the stock is expensive and terminate buybacks when the rough times come around. There have been plenty of studies completed and this has been proven time and again - buybacks peaked just before the financial crisis in 2007/2008 and were terminated by most going into 2008/2009 (when they should've been buying). Same goes for the current collapse in energy. Companies like Exxon & Chevron (and countless other O&G companies) were spending cash like no tomorrow on buybacks before 2014. After the oil prices and the share prices crashed -- when the share price was finally cheap -- these companies terminated their buybacks. We tend to forget that behind these companies are humans with emotions just like anyone else and follow the fallacies that most people suffer from.
* If share prices are really reduced, then a case can be made for the buyback program, since the rest of us shareholders get a bigger piece of the pie. But the reality is that a lot of companies dilute regularly in order to pay the employees and management. Case in point, Qualcomm, which has been aggressively buying back their stock over the course of years. But if you look at the sharecount, it hasnt done much. In fact, the number of shares increased in 2011, 2012 and 2013 and barely moved the needle in 2014 -- while the record amount of buybacks were announced & executed. One might argue that without the buybacks, the sharecount would just balloon, but the original justification for the dilution is that the company will keep it under control with buybacks.
One could argue it's an important way (specially in the tech world) to attract the talent a company needs in order to grow and succeed.
Yeah I know. The system is setup that way for people to take advantage of, and for wealth transfer from the general public to executives in these high-growth, high-profile companies that are always in the media's spotlight.
I work in the tech sector too, but not an executive. After going through my recent compensation package negotiation with my employer, instead of paying out with an increased base salary package that I was demanding, the company was more than happy to simply just give me a much bigger than expected RSU package instead. Was a bit surprised by that move, but I took it as my overall compensation package was pretty good.
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Too often the buybacks are to cover Options to Directors. Many of the buybacks seem to happen when the price is high, not low so what is their thinking?
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(03-21-2016, 12:41 PM)crimsonghost747 Wrote: (03-21-2016, 12:31 PM)Rasec Wrote: I agree with you Kerim, imagine Google for example, if they go down the dividends lane, they will be expected to keep paying those dividends, and increasing them every year, from now, until the end of times. It's a really long term commitment.
This is for the companies following the American style of increased dividend payments. Nothing is stopping a company, for example Google as you used in your example, to adopt a system similar to what a lot of European companies use. The dividend policy doesn't have to be "ok $1.00 this year and steady increases of 5% per year", it can be something like:
"The objective of the Board of Directors is that, in the long term, the dividend should be equivalent to 33–50 percent of income after standard tax, but always taking into account the company's long-term financing requirements."
That is a direct quote from one company that I've set my eyes on. And surprise surprise, even with this model it's possible to have a pretty steady stream of increasing dividends (which this company has done, though there have been years with no increases in div. payments) as long as the EPS keeps going up, which is what we want anyway. As you can see they have a 15 percentage point zone to move in so they can easily adjust their payments in the best interest of the company. (which, in the long run, will be the best interest of the shareholders too)
I've been meaning to start a separate thread on this very topic for a while now. I really prefer my steadily increasing dividends, but it has always seemed to me that paying out a percentage of earnings, even as they fluctuate up and down, makes a little more sense from a long-term management perspective.
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