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sancho panza

Stock Buybacks Are Booming, but Share Prices Aren’t Budging

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https://www.wsj.com/articles/stock-buybacks-are-booming-but-share-prices-arent-budging-1531054801

'U.S. companies are buying back record amounts of stock this year, but their shares aren’t getting the boost they bargained for.

S&P 500 companies are on track to repurchase as much as $800 billion in stock this year, a record that would eclipse 2007’s buyback bonanza. Among the biggest buyers are companies like Oracle Corp. , Bank of America Corp. and JPMorgan Chase & Co.

But 57% of the more than 350 companies in the S&P 500 that bought back shares so far this year are trailing the index’s 3.2% increase. That is the highest percentage of companies to fall short of the benchmark’s gain since the onset of the financial crisis in 2008, according to a Wall Street Journal analysis of share buyback and performance data from FactSet .

Buyback BonanzaShare repurchases among S&P 500companies have jumped this year and are setto top a record set in 2007.Share buybacks by quarterSource: S&P Dow Jones Indices
.billion2000’05’10’15050100150$200

And the historic spending spree on share buybacks has some analysts worried companies are buying their shares at excessive valuations during the peak of the economic cycle and at a time when the market rally is nine years old. Others warn the billions of dollars spent to buy back shares could have gone toward capital improvements like new factories or technology that could lead to stronger long-term growth.

“There has been less of a reward for companies engaging in new buybacks over the last 18 months,” said Kate Moore, chief equity strategist and a managing director at asset-management firm BlackRock Inc. “It’s fair for investors to ask whether companies are buying at the right point.”

The S&P 500 Buyback index, which tracks the share performance of the 100 biggest stock repurchasers, has gained just 1.3% this year, well underperforming the S&P 500.

Share buybacks have become corporate America’s go-to strategy for boosting stock prices and earnings over the past 30 years. The point of buybacks is to try to make a company’s stock more valuable. By mopping up shares, a company shrinks the stock pie, which boosts earnings per share. That, in turn, should push the share price higher.

The potential problem: Executives directing buybacks are essentially timing the market, and often they end up buying high.

Buyback activity reached a frenzy in the early 2000s; the previous record for share repurchases was $589.1 billion in 2007. But that was just a year before the stock market tumbled into the worst financial crisis since the Great Depression. The result: companies like Exxon Mobil Corp. XOM +0.31% , Microsoft Corp. MSFT +0.39% andInternational Business Machine Corp. IBM +0.87% each paid more than $18 billion to repurchase stock at a peak, only to see their share prices slump a year later.

Diminishing ReturnsPercentage of current S&P 500 companiesthat bought back shares and failed to beat theS&P 500's annual returnSource: FactSet
%2008’10’12’14’16’18020406080100

Stock buybacks appear just as ill-timed now, some analysts and investors say, especially as companies ramp up spending after last year’s $1.5 trillion tax overhaul put extra cash in their coffers.

Oracle has been one of the biggest buyers of its own stock in recent years and spent $11.8 billion on stock repurchases last year, when shares gained nearly 23%. But that gamble hasn’t looked smart this year as the networking-device maker has struggled alongside the broader market, pulling its shares down 6%.

Still, Oracle’s board approved a fresh round of share buybacks totaling $12 billion in February, and executives appear to have spent nearly half that sum already. A representative from Oracle declined to comment on its share buyback program, but the company said in a recent Securities and Exchange Commission filing that it “cannot guarantee” its share repurchase “will enhance long-term stockholder value.”

Others like McDonald’s Corp. , Bank of America and JPMorgan Chase have spent billions on share repurchases this year, but haven’t seen a short-term bounce in share prices. McDonald’s bought back $1.6 billion of shares in the first quarter, but the fast-food chain’s stock is down 7.4% this year. Bank of America and JPMorgan Chase have both spent more than $4.5 billion to buy back their shares, which are down 5% and 2.7%, respectively.

All three companies also spent multibillion-dollar sums on buybacks in 2017 as the stock market hit repeated highs.

LaggingReturns on investment for share buybacks inthe S&P 500 is at its lowest point since 2011.Median five-year buyback ROISource: Fortuna Advisors
%2008’10’12’14’16’18-20-100102030

Companies in the S&P 500 that have repurchased shares are expected to see a return on investment of about 6.4% this year, a percentage that falls below the past six rolling five-year periods as measured by Fortuna Advisors, a financial consulting firm that has examined buyback trends going back to 2007.

Returns on investment for buybacks peaked in 2013, according to Fortuna’s analysis, as companies used share repurchases to boost earnings and dig themselves out of the depths of the financial crisis. With stock prices relatively low at the time and economic activity tepid, share buybacks were one of companies’ key sources of earnings growth.

But even as the stock market steadied in the subsequent years and economic growth around the world picked up to help boost profits, corporate executives continued to spend wildly on share repurchases—often at the expense of other types of spending, including dividends and capital improvements. Spending on capital expenditures rose to $166 billion in the first quarter, up 24% from a year earlier, according to Credit Suisse , but still well below the $189 billion spent on buybacks.

“The majority of capital deployed is going right back to shareholders and not reinvestment in businesses,” said Gregory Milano, chief executive at Fortuna. “If that’s the only thing you’re relying on, it’s going to end badly.”

Some share buybacks do pay off, but that tends to be among companies that show a high level of sales and earnings growth on their own, analysts say. Apple Inc., AAPL +0.98% for example, has bought back $22.8 billion worth of stock so far this year. Its shares have risen 11%, with much of the boost coming after it reported strong gains in second-fiscal-quarter revenue and profit—as well as a record $100 billion plan to buy back more stock.

“Corporate America has such an obsession with bottom-line growth,” said Jay Bowen, president of Bowen Hanes & Co., manager of the $2 billion Tampa Firefighters and Police Officers Pension Fund. “Long term, I don’t like it.”'

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Question...do companies use surplus funds/profits that could have been used for higher divis to run buy backs, and so reward their shareholders by increasing the share price?

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3 hours ago, MrXxx said:

Question...do companies use surplus funds/profits that could have been used for higher divis to run buy backs, and so reward their shareholders by increasing the share price?

Yes.

Also worth noting that buy backs increase earnings in periods when real earnings are declining.

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1 minute ago, sancho panza said:

Yes.

Also worth noting that buy backs increase earnings in periods when real earnings are declining.

SP, how?...is it because of the increased spread in the shares that they owned prior to the buyback?

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Just now, MrXxx said:

SP, how?...is it because of the increased spread in the shares that they owned prior to the buyback?

Company makes £100mn and has 100mn shares eps £1.

Shares cost £10 (p/e 10,market cap £1bn).

Uses 50% of profits to buy back £50mn worth shares at£10=5mn shares

Now 95 mn shares and if profits stay at£100mn, eps=£1.053

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Crafty buggers!..I can see how this is used and abused, especially in a downturn. Thanks for explanation.

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15 minutes ago, MrXxx said:

Crafty buggers!..I can see how this is used and abused, especially in a downturn. Thanks for explanation.

Even worse if they're borrowing the money to do it.............lol.

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12 minutes ago, sancho panza said:

Even worse if they're borrowing the money to do it.............lol.

Even worserer ...

CxO pull every trick to boost EPS - share buybacks,  dubious accounting, taking over other compnaies and stripping all the cost out so they fall to bit in a couple years ....

Then CxO geta a stock payout. Take cash, leave company.

Then all chickens roost and the company fall to bits.

Carrilion is a good UK example.

But the bets is GE - as its the template for all the fucked up, stupid MBA idiot scams that have prevalent since, err, GE started doing them.

 

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1 hour ago, sancho panza said:

Company makes £100mn and has 100mn shares eps £1.

Shares cost £10 (p/e 10,market cap £1bn).

Uses 50% of profits to buy back £50mn worth shares at£10=5mn shares

Now 95 mn shares and if profits stay at£100mn, eps=£1.053

Incredible.

Is there any website that monitors buybacks so that people can evaluate what the true company performance is like?

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Posted (edited)
On 09/07/2018 at 15:29, sancho panza said:

Others warn the billions of dollars spent to buy back shares could have gone toward capital improvements like new factories or technology that could lead to stronger long-term growth.

How quaint an idea!  So last whenever.

I imagine things are more complicated regarding the share prices.  For example, what was their overseas cash held in?  Equities?  Plus you can't say stocks have not gone up and they are paying too much at the same time.  And of course no one will say buy backs will improve shareholder value - maybe they rarely do, regardless.

A bit of a fluffy article really.

Edited by No Duff

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Posted (edited)
23 hours ago, sancho panza said:

Yes.

Also worth noting that buy backs increase earnings in periods when real earnings are declining.

EPS, if you don't do your basic due diligence when looking at these things.  There's a now old book, Accounting For Growth, which lists most of them.  One of the ways some make money these days and others don't.  Merger accounting, provisioning, intangibles, off balance sheet, and so on.  Problem is I fear most of them are at it.

  

Edited by No Duff

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Posted (edited)
22 hours ago, reformed nice guy said:

Incredible.

Is there any website that monitors buybacks so that people can evaluate what the true company performance is like?

I believe the company has to announce it.  One of my favs:

http://m.4-traders.com/RIGHTMOVE-GROUP-9590217/news/RIGHTMOVE-PLC-Transaction-in-Own-Shares-26763814/

Since 2007!

Edited by No Duff

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Posted (edited)
2 hours ago, No Duff said:

EPS, if you don't do your basic due diligence when looking at these things.  There's a now old book, Accounting For Growth, which lists most of them.  One of the ways some make money these days and others don't.  Merger accounting, provisioning, intangibles, off balance sheet, and so on.  Problem is I fear most of them are at it.

  

I knew who written it as soon as I saw the title.

Terry Smith.....up there with Tony Dye.

2 hours ago, No Duff said:

I believe the company has to announce it.  One of my favs:

http://m.4-traders.com/RIGHTMOVE-GROUP-9590217/news/RIGHTMOVE-PLC-Transaction-in-Own-Shares-26763814/

Since 2007!

On 10/07/2018 at 14:07, reformed nice guy said:

 

'Rightmove has purchased to date 39,547,596 of its own shares since announcing a share buy-back programme on 28 December 2007.

The total number of ordinary shares in issue (excluding treasury shares) following this announcement is 90,686,392. Rightmove holds 1,671,420 shares in treasury.'

 

Look at those figures...................................before you dug that out ND Rmwas one of my favourite shorts....not currently short but soon I think.There's a long way to go down I think from £50

Edited by sancho panza

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Posted (edited)
1 hour ago, sancho panza said:

Look at those figures...................................before you dug that out ND Rmwas one of my favourite shorts....not currently short but soon I think.There's a long way to go down I think from £50

Countrywide too I believe if you're interested.  Hamper at Christmas and we're evens!

Buy backs = "share support"?  In which case no wonder the share prices aren't rising!  Not that the article covered that?

Edited by No Duff

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1 hour ago, sancho panza said:

....

'Rightmove has purchased to date 39,547,596 of its own shares since announcing a share buy-back programme on 28 December 2007.

The total number of ordinary shares in issue (excluding treasury shares) following this announcement is 90,686,392. Rightmove holds 1,671,420 shares in treasury.'

.....

So a quick calc - bought back 31% of shares.

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1 hour ago, No Duff said:

So a quick calc - bought back 31% of shares.

Now that's incredible @reformed nice guy :ph34r:

Yeah,you have to wonder where they could go wrong buying back at within 105 of their all time high,somewhere near 2500%north of where they were at the 2008 bottom?

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Posted (edited)
2 hours ago, No Duff said:

Countrywide too I believe if you're interested.  Hamper at Christmas and we're evens!

Buy backs = "share support"?  In which case no wonder the share prices aren't rising!  Not that the article covered that?

Thanks for the heads up.

If you have a butcher's at the Short thread,you can already see they're on my radar.

Countrywide and Foxtons I missed.Only began shorting for the first time in years with Barrats and Taylor Wimpey punts about 4-6 weeks back(have since added Travis Perkins/Reckitt/ITV).RM's chart hasn't rolled yet,but my gut telling me top is in.Never trade my guts if I can avoid it as they're rank.

Haven't seen any value in shorting for years but all of a sudden things are turning.I remember saying to you on ToS that I thought the top was in on the dow at year start and I'm holding with that.Builderts going down was the prewarning in 2007 if you were aware of it-I wasn't.

Edited by sancho panza

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There was Dr Bubb on TOS now at Green Energy Investors that used BDEV for the builders share index direction. This mkt indicator can be a good 8 maths or so ahead of the market. If it is rolling over then the last quarter and first of 2019 could be interesting.good luck to those taking out short positions I wish you success

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Posted (edited)
15 hours ago, sancho panza said:

I remember saying to you on ToS

Good try me old fruit but Fence really has gone.  Muttered something about Sophie (oh, that's the younguns name) being further up the utility curve than cash. 

Anyways, buggered off to the family estate in Tuscany muttering something about "if you can't beat them" (I think he meant 'em) to which I asked why not Germany then and he said cos the Italians have been at it longer.  I think he meant the naughty stuff with money.

He left me with the remains of his "chemistry set" as he called it which is a mixed blessing because either he really was clever or there's nothing there.  BTW, all that Oxbridge INSEAD stuff was indeed true (I was his valet in the regiment) but the Oxbridge Blue thing was a bit of a stretch since bridge is no longer classed as a sport.  

Anyways it's all a bit of a struggle as I clearly lack his temperament given my affinity for the tabloid end of things over on the "Off Topic" section and having already put the cabal's nose out of joint here.  Maybe time for me to also move on with Maple (alas not Sophie) to our family static home in Borth.

bluebird_caravan_018.jpg.8172111a4c2879b38da4c0aa22e04cca.jpg

Maple's the one with the camera.

He spoke very highly of you.

Edited by No Duff

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15 hours ago, Agent ZigZag said:

There was Dr Bubb on TOS now at Green Energy Investors that used BDEV for the builders share index direction. This mkt indicator can be a good 8 maths or so ahead of the market. If it is rolling over then the last quarter and first of 2019 could be interesting.good luck to those taking out short positions I wish you success

I thought you sounded too innocent!  Seems we both go back a long way.  Oh my, maybe DB is Dr Bubb?  Maybe you know.  Maybe you all know except me.  Oh my.

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Something I've always wondered about stock buybacks:

What happens if a company buys back ALL of its stock?

Most unlikely I know but what would be the legal/commercial consequences of a company owning itself 100%.

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3 minutes ago, jm51 said:

Something I've always wondered about stock buybacks:

What happens if a company buys back ALL of its stock?

Most unlikely I know but what would be the legal/commercial consequences of a company owning itself 100%.

And what about the threshold whereby above a certain percentage of stock you have to declare an offer to buy all the stock (30% I think)?

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I've heard of that but thought the % was higher, like 70% or more?

Always thought that was an option rather than obligatory.

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7 minutes ago, jm51 said:

I've heard of that but thought the % was higher, like 70% or more?

Always thought that was an option rather than obligatory.

https://uk.practicallaw.thomsonreuters.com/1-518-5074?transitionType=Default&contextData=(sc.Default)&firstPage=true&comp=pluk&bhcp=1

Once a person either:
  • Acquires 30% or more of the target's voting rights.
  • Is
     interested in shares carrying 30% to 50% of the target's voting rights,
     and that person or a concert party acquires an interest in any other 
    voting shares in the target. 

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