Why Stock Buybacks Are a Warning Sign for Smart Investors
With the exception of ExxonMobil, these companies lack catalysts to propel them upward, and you should view their stock buybacks as an admission of defeat on the part of CEOs who lack the imagination to come up with growth investments. ExxonMobil ought to be able to find places to invest, but it benefits from rising oil prices, so it could still be a good investment.
Why are stock buybacks a problem? Their proponents argue that they return money to shareholders. But as I wrote last October on DailyFinance, many professional money mangers and investors interpret stock buybacks as a sign that company CEO aren't doing their most important job -- finding sources of new growth. If the best idea they can come up with is to funnel money back to shareholders, those company boards should replace the CEOs with people who have better ideas.
Primarily, stock buybacks are a shell game designed to boost CEO pay. Analysts look at the stock buybacks and realize immediately that they will reduce the number of shares outstanding, thus artificially boosting earnings per share. Since many CEOs get bonuses based on EPS increases, by giving money to the shareholders, they indirectly pave the way to higher bonuses for themselves.
According to Silverblatt, of the $86 billion in buybacks, the four biggest sectors are as follows:
- Information technology (22.3%)
- Consumer discretionary (15.9%)
- Consumer staples (15.5%)
- Health care (14.4%)
- ExxonMobil bought back $152 billion worth of stock between 2004 and 2010. Its price rose 43% to $73.12 a share during that time. EPS growth is not a CEO bonus driver, and its CEO compensation fell 15.5% in the most recent year available, 2009 to $27.2 million.
- Microsoft bought back $97 billion worth of stock between 2004 and 2010. Its price rose 4.5% to $27.91 a share during that time. EPS growth is a not a CEO bonus driver, and its CEO compensation grew 6% in 2010 to $1.3 million.
- Walmart bought back $35 billion worth of stock between 2004 and 2010. Its price rose 2% to $53.93 a share during that time. EPS growth is not a CEO bonus driver, and in the most recent year available, 2009, its CEO compensation fell 32% to $19.2 million.