The other day on the Twitter, friend of the blog Robert was going on a little rant about share buybacks. Specifically, he was making fun of a dumb article (that shall remain unlinked) that blamed share buybacks for all sorts of ills in the economy. This article argued corporate America should be forced to spend their cash innovating or hiring more people, and not on reducing the number of shares outstanding.

Anyhoo, here’s what Robert had to say.

 

Huh. Turns out I did have to link to that dumb Vox piece. Whatever you do, please don’t click on it. You know I’m serious when I start being polite.

Robert brings up a lot of good points when it comes to share buybacks. The fact is employees don’t have same sort of rights when it comes to profits. Employees get paid for doing a job. In exchange for that guaranteed paycheque, they don’t have to worry about the company losing money. They still get paid. Owners don’t get paid when a company loses money.

In exchange for taking this risk, owners get the reward of sharing in the profits. These owners can then decide to reinvest the capital back in the company, pay it out as dividends, or use it to reduce the number of shares outstanding. All are worthy goals at different points of a company’s life.

Obviously, Robert is all for dividends and share buybacks. I mean look at his Twitter name. He’s more transparent than single Nelson was. Any good capitalist should be all for activities that benefit the owners of companies, whether those activities are buybacks, dividends, or just inviting shareholders in to talk to the hot blonde from accounting.

I’m all for share buybacks too. I just wish they were executed a little better.

Be smarter

The cycle of share buybacks tends to go something like this.

When times are bad and shares are depressed, companies never bother to cannibalize their own shares. They do other stuff instead, like building up cash or paying off debt. Management is nervous, and wants to make sure other needs are taken care of.

Then the business cycle improves, and companies start doing shareholder friendly things. Dividends increase after being froze or cut. Buybacks begin again. People start feeling better about general economic conditions.

Finally, we get to the point of the business cycle where we’re at today. Times are good, corporate profits are high, and companies are flush with cash. Dividends have already been hiked, and opportunities to expand the business and earn a satisfactory return are few and far between. With no other use for the cash, management buys back their own shares with the enthusiasm of Buck Showalter making terrible managerial decisions. SUCK IT, BALTIMORE.

What happens is companies spend the majority of their cash buying back shares when the economy is good and share prices are high, and then they hoard cash when the economy is bad and share prices are low.

This is the exact opposite of what you want to do.

This isn’t really an anti-share buyback rant, because the concept is still sound. It’s the execution that really has a lot to be desired.

The other issue

I touched on this back when I made fun of Coca-Cola’s terrible share buyback record.

Basically, the makers of happiness in a bottle issued an assload of stock options, and bought back juuuuust enough shares to offset those options. Allow me to quote the smartest guy I know, myself:

fu-snip

Coca-Cola gave out shares to execs like they were reject bottles from the manufacturing process. Sure, the company did the right thing by buying back a bunch of shares, but they issued them almost as quickly. The net result doesn’t end up to be that exciting.

You’d be amazed at the number of big companies that pay their top guys very generously and then give them stock options like this unnamed internet company on the Simpsons.

share-buybacks

Let’s wrap it up

Buying back shares is a great idea, provided companies do it well. Unfortunately, most aren’t great at it. When push comes to shove, being bad at it is still better than not doing it at all, but I would like to see it done a little better.

And if you find a stock that’s good at buying back shares, hold it close and never let go. They’re pretty rare.

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