Monday, December 16, 2013

Companies Turning Again to Stock Buybacks to Reward Shareholders (at all-time highs)

If one's purpose is efficient allocation of corporate resources/capital deployment, this is about as stupid as it gets. If however the goal is to concentrate the means of production into fewer and fewer hands you would buy high, you would buy low, you would just buy and buy.
I'm not saying that's what they're doing but it is the result.
From the Washington Post:
Battered by months of dis­appointing sales, networking giant Cisco needed a way to give its shareholders a pick-me-up. So the San Jose-based firm did what has become routine for many big U.S. companies in a slow-growing economy: It announced last month that it was buying back shares of its stock.

The amount authorized to be spent was $15 billion, surpassing the $10 billion in net income the company earned last year. It’s also 21 / 2 times what Cisco spent on research and development, and it comes as the company lays off 5 percent of its workforce, or 4,000 employees.

This is what U.S. multinationals do now with their cash. Rather than tout big new investments, raise worker wages or hire more employees, companies are more likely to set aside funds to reward shareholders — a trend that took a dip during the recession but has roared back during the recovery.

The 30 companies listed on the Dow Jones industrial average have authorized $211 billion in buybacks in 2013, according to data from ­Birinyi Associates, helping to lift the benchmark stock index to heights not seen since the tech boom of the late 1990s. By comparison, the amount is nearly three times what the group spent on research and development last year, according to data from S&P Capital IQ....MORE
HT: Ritholtz@Bloomberg
And from EconMatters:

Stock Buybacks at Market All-Time Highs: Poor Use of Corporation Capital 
Era of Stock Buybacks
This has definitely been the era of stock buybacks with such low borrowing costs as companies are borrowing at very low rates not to expand the business, create innovative products, increase research and development but to buy back their own stock which isn`t cheap considering the multiple expansion in markets the last five years. 
But earnings from a revenue side have been subpar to say the least and companies are buying back stock each quarter just to make their quarterly numbers look better than they actually are based upon the year over year business growth.

The funny thing is that this has been going on for four years, these are public companies right? At what point do the floats become so small that for all intents and purposes these are private companies? I am being a little facetious here, but this has to be the longest continuous era of stock buybacks on record all fueled by the Fed`s never before witnessed five straight years with the Fed Funds Rate at near zero percent. 
Is this the Best Use of Company Capital?
It is a real shame that these companies don`t have some better use for this cheap government loans in essence than stock buybacks. How is the economy ever going to grow if these companies don`t try to expand their businesses with this cheap capital, hire more workers, and thus have future customers for their products who are now employed consumers.
But with stock floats getting smaller and smaller and company stocks at record highs isn`t this the opposite of buying low and selling high? The companies are buying their stock when it is extremely over-valued. Isn`t the smart use of stock buybacks to buy back the company stock when the company thinks that the shares are undervalued by the market? You know, buying low and selling high, doesn`t this just make for good business practices? 
50% Losses on Buybacks?
By my thinking most of these stock buybacks are going to be underwater once QE ends this summer of 2014, and the stock buybacks are going to be net losses for these companies down the line. How do responsible boards allow this type of behavior, buying back stock at exceptionally high levels? 
Furthermore, once interest rates start rising and companies have to start raising capital where do you think it is going to come from? These same shares are going to return to market at much lower prices, further pushing stock prices down vie share dilution. This is the exact opposite of how a solid business would want to manage operations, cash on hand, borrowing, and managing stock buybacks....MORE
How much loot are we talking? Here's CNBC six weeks ago:
$3.5 trillion so far, and more ahead for buybacks
The high likelihood that the Federal Reserve will maintain current interest rate policy means stock buybacks likely will remain in vogue.

Just a short time ago, it looked like the dividend payments and share repurchase programs that companies have used aggressively to boost their stock prices might start to fade once the U.S. central bank unwound its stimulus and ultimately normalize interest rates.

That's because companies have used cheap financing courtesy of the Fed as a means to underwrite those buybacks. Nonfinancial companies have a post-crisis high debt of $13.1 trillion on their balance sheets, compared to $1.8 trillion of cash that they've been hanging onto....MORE