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
THEY DON'T RING THE BELL AT THE CRPTO MARKET TOP! - 20th Dec 24
CEREBUS IPO NVIDIA KILLER? - 18th Dec 24
Nvidia Stock 5X to 30X - 18th Dec 24
LRCX Stock Split - 18th Dec 24
Stock Market Expected Trend Forecast - 18th Dec 24
Silver’s Evolving Market: Bright Prospects and Lingering Challenges - 18th Dec 24
Extreme Levels of Work-for-Gold Ratio - 18th Dec 24
Tesla $460, Bitcoin $107k, S&P 6080 - The Pump Continues! - 16th Dec 24
Stock Market Risk to the Upside! S&P 7000 Forecast 2025 - 15th Dec 24
Stock Market 2025 Mid Decade Year - 15th Dec 24
Sheffield Christmas Market 2024 Is a Building Site - 15th Dec 24
Got Copper or Gold Miners? Watch Out - 15th Dec 24
Republican vs Democrat Presidents and the Stock Market - 13th Dec 24
Stock Market Up 8 Out of First 9 months - 13th Dec 24
What Does a Strong Sept Mean for the Stock Market? - 13th Dec 24
Is Trump the Most Pro-Stock Market President Ever? - 13th Dec 24
Interest Rates, Unemployment and the SPX - 13th Dec 24
Fed Balance Sheet Continues To Decline - 13th Dec 24
Trump Stocks and Crypto Mania 2025 Incoming as Bitcoin Breaks Above $100k - 8th Dec 24
Gold Price Multiple Confirmations - Are You Ready? - 8th Dec 24
Gold Price Monster Upleg Lives - 8th Dec 24
Stock & Crypto Markets Going into December 2024 - 2nd Dec 24
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 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