Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

The Ruinous Truth About Stock Buybacks

Companies / Investing 2012 Sep 21, 2012 - 05:39 AM GMT

By: Money_Morning

Companies

Best Financial Markets Analysis ArticleMartin Hutchinson writes: Every time I hear a Wall Street analyst extolling the virtues of stock buybacks I just want to scream.

"Don't fall for the flim-flam," I think to myself, "demand the cash instead!"


That's why my Permanent Wealth Investor service focuses on the kinds of dividends you can actually hold in your hand. For me, cash is king.

Anything else is simply a magician's trick. It's a sleight of hand designed to make you think you're getting something when you really aren't.

Share repurchases or buybacks are the perfect example.

Behind the wondrous façade, stock buybacks are just a means for management to enrich themselves. The truth is buybacks are positively damaging to the interests of ordinary shareholders.

The Ruinous Truth Behind Apple's Stock Buyback
Take Apple Inc. (Nasdaq: AAPL), for instance. It's the stock everybody loves these days.

This $653 billion company recently announced a $10 billion stock buyback over three years, beginning October 1. Naturally, shareholders cheered, believing the buyback would boost the share price.

But consider this: Apple is buying back shares at several times book value, so the buyback will actually dilute Apple's book value per share.

Based on the latest quarter, Apple's tangible book value was $106.3 billion, or $113 per share, while its stock closed today near $697 a share, or 6.2 times book value.

If Apple does a $10 billion buyback, it will reduce its book value by $10 billion to $96.3 billion while it reduces its share count by $10 billion/697 or 14.3 million shares, thus reducing its book value per share by 8.0% to $104.

Yes, its share price may trade at a greater premium to the reduced book value, but the chances are its premium will only increase modestly - in which case the $10 billion share buyback will REDUCE Apple's share price.

What's more, Apple is so generous to its top management and its share price is so high that its $10 billion share buyback will probably not be sufficient to satisfy management's stock options.

That means that at the end of the three years, Apple will have more shares outstanding than it had at the start.

Given that the buyback will almost certainly be carried out in private transactions between Apple and the large investment institutions, the benefit of the buyback to us ordinary shareholders thus escapes me.

Apple has also started paying a cash dividend, which is worth something; in this respect, good for them! But the buyback is a pure waste of shareholder money.

The other problem with the Apple buyback is that, being carried out at a price above $600, it is very expensive. For Apple, this may not matter much; the company's cash pile is so vast that it may be able to continue buybacks even during the next recession.

Then There's the Madness at AIG
A more egregious example comes from the insurance company American International Group (NYSE: AIG), which escaped bankruptcy in 2008 and is now buying back shares aggressively, having just announced a new $5 billion program.

However, it should be noted that AIG also bought back shares aggressively in 2004-2007, at prices that are now equivalent to $1,500 a share. To buy back shares at $1,500 that will soon be worth $35 is a transaction that only the financial services industry could deem attractive!

AIG was not alone in this madness, either.

All the major banks, including JP Morgan Chase (NYSE: JPM) and Citigroup (NYSE: C), spent much of the years 2004-08 buying back shares at high prices -- which they then had to re-issue to the market at a much lower price in 2009.

Today these same banks have already re-embarked on buyback programs without restoring their dividends to pre-2008 levels. That alone should tell you something.

In general, buyback programs are more attractive to management than dividends, because their stock options do not get the benefit of dividends, which lower the stock price by the amount of the dividend when they are paid.

Interestingly, this is not the case with Apple, where employee option holders will be given the benefit of dividends paid by Apple, as if they had owned the shares themselves - thus further diluting the value of nonemployee investors' holdings, of course.

Fortunately, most companies haven't got around to this additional shareholder rip-off yet.

To me the moral is clear. Dividends are paid in cash, to all shareholders, and thus represent a real value return on your investment.

On the other hand, stock buybacks give nothing to the individual shareholder, may reduce his share price if carried out at too high a price, and may endanger his dividend by reducing the company's cash reserves in the next recession.

That's the part Wall Street conveniently decides to leave out.

Source :http://moneymorning.com/2012/09/21/what-wall-street-will-never-tell-you-about-stock-buybacks/

Money Morning/The Money Map Report

©2012 Monument Street Publishing. All Rights Reserved. Protected by copyright laws of the United States and international treaties. Any reproduction, copying, or redistribution (electronic or otherwise, including on the world wide web), of content from this website, in whole or in part, is strictly prohibited without the express written permission of Monument Street Publishing. 105 West Monument Street, Baltimore MD 21201, Email: customerservice@moneymorning.com

Disclaimer: Nothing published by Money Morning should be considered personalized investment advice. Although our employees may answer your general customer service questions, they are not licensed under securities laws to address your particular investment situation. No communication by our employees to you should be deemed as personalized investent advice. We expressly forbid our writers from having a financial interest in any security recommended to our readers. All of our employees and agents must wait 24 hours after on-line publication, or after the mailing of printed-only publication prior to following an initial recommendation. Any investments recommended by Money Morning should be made only after consulting with your investment advisor and only after reviewing the prospectus or financial statements of the company.

Money Morning Archive

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in