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  • Buybacks: Not All They're Cracked Up to Be
    thanks for your thoughtful post. i agree with most of the points you make.

    i am in no position to challenge the studies you mention. they would be an interesting read, for sure. i would be most curious as to how they would measure success of a buyback program. if it's share performance over time, how could the singular effect of a buyback on share prices be isolated? i assume that it would require comparison to a control group where buybacks did not occur but there are so many variables that determine share prices i just don't see how any such study could be definitive. markets are dynamic...P/E expansion or contraction alone occurs constantly...in different market periods and in different industries, driven by a host of variables including interest rates, investor sentiment, economic data, etc. neither does it make intuitive sense to me that one could broadly conclude...study or no study...that companies that buy back their shares consistently outperform. it requires belief that these companies can time repurchases for optimum performance and do it regularly. i'm very skeptical.

    one way...maybe the only definitive way...to prove the efficacy of a buyback program is to compare over a lengthy period the weighted average share price of stock purchases against the current share price. but even that type of analysis is limited. the true effect of a buyback must take into consideration the effect on both earnings, cash flow and dividends of the period studied. but neither would it include opportunity costs. should apple have repurchased shares instead of focused on product development that gave birth to the i pod and the i phone? obviously not. and even if the period of measurement were sufficiently lengthy to capture market cycles, the positive effects of buybacks, to the extent they occur, can disappear overnight if either the company risk profile (i.e. securities risk) or securities markets (i.e. market risk) deteriorate meaningfully. we've seen the most extreme example of this since the great depression in the collapse of our very financial system. the major banks...thought to be rocks of gibralter just a couple of years ago...today can't raise equity capital. either it is be prohibitively expensive or not even possible because there are no buyers.

    this leads to my primary objection about buybacks, which has nothing to do with their effectiveness and everything to do with stewardship of the business. i believe:

    1. capital is precious and it should be safeguarded. it should be regarded as permanent.
    2. managements rely too much on financial gimmickery to boost share prices when they should be directing their efforts to developing the business. this has been particularly true in the last 20 years or so.
    3. the practical way to reward shareowners is through dividends. it puts real cash in shareowners pockets and if the company runs into trouble the dividends can be reduced or revoked.

    i've worn out my welcome on this issue. but thanks for hearing my views.


    On Jan 07 11:19 PM AJB7 wrote:

    > Response to Icandoitdon: The study I was specifically refering to
    > is Richard Tortoriello's Quantitative Strategies for Achieving Alpha,
    > but there are numerous studies dating over the past 20 years that
    > have confirmed this finding including those by Josef Lakonishok,
    > Theo Vermaelen, and David Ikenberry. More recent studies continue
    > to confirm these findings (eg Peyer and Vermaelen, 2005 and Gup and
    > Nam, 2005).
    >
    > The one (and only to my knowledge) study that did not show value
    > added by buyback companies as a group was done by Standard &
    > Poor's and covered 2006 and the first half of 2007. Researchers as
    > well as long term investors may well not want to overturn findings
    > that have been true for three or four decades based on eighteen months
    > of recent performance. Still, I suppose it is possible that some
    > paradigm shift has begun and the juice has been squeezed out of this
    > market inefficiency.
    >
    > Incidently, I was speaking of share buyback companies as a group,
    > but of course any individual company is another matter. Studies have
    > also shown that share buybacks in context of insider selling or certain
    > use of discretionary accruals, among other things, are red flags
    > for future company performance and these stocks should be avoided.
    >
    >
    > But perhaps, as the S&P study initially suggests, there has been
    > a risk myopia bubble that has recently infected a broader swarth
    > of companies on the buyback issue. No doubt this will be looked on
    > in the future as one aspect of the broader value distortion in other
    > financial areas during the last few years. But if it is a bubble,
    > then it is likley to be a passing phase I suspect. Only time will
    > tell.
    >
    >
    >
    >
    >
    Jan 08 00:44 am |Rating: 0 0 |Link to Comment |View article
  • Buybacks: Not All They're Cracked Up to Be
    since when has a share buyback ever put one nickel in a shareowners' pocket? i can name countless companies whose share price has gone nowhere over the last 10 years, during which time billions in capital have been squandered in share buybacks.

    i have no objection to limited buybacks for a specific purpose, e.g. to fund stock plans for employees. but the notion that broad, regular buyback programs somehow serve shareholders is a fiction propogated by self serving companies who don't want to pay dividends because it locks them in to a shareowner commitment....period. any shareowner who believes this is a good use of capital is ignorant of corporate finance.






    On Jan 07 12:39 AM Anthony Alfidi wrote:

    > Buybacks can be a useful tool for a CFO of a healthy company. Younger
    > companies can use them to return cash to investors in lieu of declaring
    > a dividend, thus retaining their cache as a growth stock. Institutional
    > investors like them because they help counter the dilution that results
    > when the company's insiders exercise stock options or collect share
    > grants.
    Jan 07 20:30 pm |Rating: 0 0 |Link to Comment |View article
  • Buybacks: Not All They're Cracked Up to Be
    i dont know what "research" you're referring to but i do know this:
    one year returns prove absolutely nothing. buying back shares permanently shrinks a firm's capital base and increases leverage. if you think there is no risk to doing this you do not understand finance.

    ponder this:

    aggregate stock market returns over the last 10 years have been approximately zero. what does this suggest about aggregate share buybacks during this period? it suggests that it has been a singularly foolish waste of one of the most precious resources a company has...its capital. it cannot be issued on a whim and, in some markets....today's for example...it is nearly impossible to raise.

    golfbargainhunters is absolutely correct: companies typically buy shares back after a successful run when they're flush with cash...exacxly the wrong time to do it. i can name many companies today...nearly any retailer or financial institution, for example...who would be wise to consider share buybacks given the carnage in their share prices over the last year but they can't do it because they desperately need the capital.

    the author is spot on. if they can't reinvest their profits to grow the business let them pay dividends. buybacks are for idiots who don't know any better.



    On Jan 06 09:50 PM AJB7 wrote:

    > This opinion is not supported by the facts. Research has consistently
    > shown that companies with the largest one year reduction in shares
    > as a group outperform other stocks, with one recent study showing
    > the top quintile earning a positive excess return of 3.1% vs the
    > bottom quintile earning a negative excess return of 5.2% over the
    > 1991-2007 period.
    Jan 06 23:50 pm |Rating: +1 0 |Link to Comment |View article
  • Tessco: Do Buybacks Make Sense?
    it's not that simple. there are no reliable hard and fast algorithms that can be applied to stock buybacks any more than to individual stock selection. businesses are dynamic and fortunes can change rapidly. if investing lent itself to simple algorithms, we'd all be billionaires, and buybacks would always be antidilutive.

    take your case of a company selling below book with excess cash for which there are no alternative uses. it is a flat out false premise. the alternative use for any company with excess cash and no appealing reinvestment alternatives is to initiate or increase dividends. it is far less risky than buying back shares.

    take citibank. in a vacum, citigroup, selling far below book, would buy back shares because they can borrow from the fed at virtually no cost and, if they can earn even a small fraction of what they did two years ago, their earnings yield would be far in excess of the puny cost of borrowed funds, making share repurchases a no brainer...so what's stopping them (aside from the fed not permitting it)? what stops them is that they know they need every nickel of capital they have because they are virtually shut out of the equity markets. but even if they weren't, issuing sufficient shares twould be hugely dilutive given their decimated share price. investors do not see them as a viable, stand alone entity, notwithstanding the hopes, dreams and prayers of the fed. would anyone have forecast that just 2 years ago? no way no how. citi squandered billions on share buybacks on their way to oblivion. so did most other major financial institutions. shrinking their capital base was an unbelievably stupid use of resources.

    managements should run their businesses. excess cash should be returned to shareholders as dividends if it cannot be reinvested profitably. that's mangement 101.






    On Jan 04 08:38 PM Paul Price wrote:

    > Buybacks can make sense if the company has sufficient excess cash
    > plus:
    >
    > Shares are below book value making buybacks anti-dilutive to B/V.
    >
    >
    > Shares are available at an earnings yield that is superior to reinvestment
    > rates [IRR] and/or returns available on cash.
    >
    >
    >
    Jan 05 00:39 am |Rating: 0 0 |Link to Comment |View article
  • Tessco: Do Buybacks Make Sense?
    i am the commentator who challenged the author on the use of share buybacks to enhance shareowner value. i argued that in most cases they simply squander precious capital.

    the issue with share buybacks for me is not whether individual traders may enjoy a short term benefit from share buybacks. it is whether long term shareholders reap rewards. while there are exceptions to every rule, i believe it is highly uncommon. as the author points out, he sold his shares at an opportune time and his benefit from any buyback in terms of an enhanced share price was likely the new shareholder's loss. it is hard to argue....lacking imperical evidence....that buybacks permanently boost share prices. earnings and dividends boost shareholder value over the long term....not buybacks.

    using the author's data, the weighted average buyback price of TESS since 2004 is $13.30, which represents a loss of capital of $3.93 per share over the current share price of $9.37. in dollar terms, that is a loss of $10.5 million on a capital shrinkage of $35.7 million. to add insult to injury, as the author acknowledeges, the company financed certain of these share buybacks with borrowed money. this incrementally detracts from EPS above and beyond the opportunity cost of the lost cash, i.e. lower investment income. it's equivalent to an individual investor buying stocks on margin...it's a great investment if the stock goes up but a horrible investment if the stock goes down. the performance of TESS over this 5 year period speaks for itself. in continuing to buy back shares, they're doubling down on a losing bet. as a long term investor, i'd much rather see a company maintain it's capital base, putting excess cash to work by paying dividends, enhancing R&D, making sensible acquisitions, etc., rather than by financial engineering that has no demonstrated long term value.




    Jan 04 14:41 pm |Rating: +1 0 |Link to Comment |View article
  • Jim Rogers on Banking Bailout: 'Horrible Economics'
    christ, what a simple minded post. u.s. citizens living abroad still pay u.s. income taxes and enjoy the same rights and priveleges as other u.s. citizens, including the right to criticize our government. it's a right afforded by the u.s. constitution called free speech.

    rogers is right about some things and wrong about others. i do agree with him on this much: we have an incompetent federal reserve, treasury and SEC, not to mention the entire u.s. congress, and they earn the criticism they receive. there are a hell of a lot of other u.s. citizens who would agree with him. if you think it makes them less patriotic than flag-waving simpletons, you don't understand have a simple-minded view of patriotism.


    On Jan 04 12:18 PM sickofthehype wrote:

    > So because he predicted China's coming around, this guy is golden
    > huh?
    >
    > How anti-American can someone be.. the guy relocated his family to
    > Singapore and now continues to bash the US.
    >
    > Sure, he's made some great investments in the past. Big deal. Enjoy
    > Singapore there Rogers.
    Jan 04 13:39 pm |Rating: +7 -1 |Link to Comment |View article
  • The Lending Lunacy Continues as GMAC Gives Out More Bad Loans
    amen. well said.


    On Jan 03 02:18 PM countrybanker wrote:

    > jepittman:
    >
    > I have made many loans to consumers for autos, those consumers being
    > both low income, middle income and wealthy.
    >
    > Here is what you are missing:
    >
    > 1. "Federal Reserve has decided" is your first bad analysis. It is
    > wrong for the Fed to do this. Do your research on the unprecedented
    > acts of the Fed. Not Good. We will all pay for their lunacy. Second,
    > Fed just allowed them to be a BHC, it was the Treasury(taxpayer)who
    > pumped in the money.
    >
    > 2. Noone posted that poor or low income people do not deserve credit!
    > of course they do, but you then use word "subprime". Regardless of
    > how you wish to label things, only extensions of credit that will
    > be repaid should be made, should be pooled and securitized. Its the
    > uncollectible bad credit and the volume of the same, along with the
    > lack of disclosure and transparency which created the credit crisis.
    > Putting bad credit on the books serves noone, the debtor, creditor,
    > GM or the citizenry. Just the opposite is true.
    >
    > 3.Most low income people have great/excellent credit, this is not
    > about class warfare. Stay away from there.
    >
    > 4.Why would you cite GMAC as a company capable of managing credit.
    > They are effectively bankrupt. Thats why there is a bailout of GMAC
    > as well as GM. GMAC cannot sell its paper in the capital markets;
    > the market has spoken. GMAC is not creditworthy itself.
    >
    > 5. Finally, your last paragraph is true, because you now say "reasonable
    > credit", which is good for the economy, GM,its employees, etc. <br/>
    >
    > However, bad credit has the opposite long term effect. GMAC practices
    > have to be questioned because they just went broke, they just made
    > huge credit mistakes, they were just forced to beg you and me for
    > a bailout, and 10 minutes after receiving it, they announce looser
    > credit standards. Why would we taxpayers trust them.
    >
    > As a new point, was the bailout fair to Ford? Ford Credit? All the
    > credit unions, S&amp;L's and commercial banks accross the country?
    > Of course not. If this bailout shifts sales to GM from Ford and Ford
    > closes a plant due to less sales, was it fair to that laidoff Ford
    > factory worker?
    >
    > I suppose I am now a Ford employee to. ? By the way, do you work
    > for a failed company named GMAC?
    >
    >
    Jan 04 00:17 am |Rating: +1 0 |Link to Comment |View article
  • First Step to Fix the Markets: Let Shareholders Vote on Buybacks
    there are always exceptions to the rule. my objection to stock buybacks is the mindless mantra dutifully repeated by financial journalists, analysts and other members of the financial ignorantsia that stock buybacks are good for shareholders. it's utter rubbish.

    as for apple.....

    you are probably young so i forgive your naievete. about 10-12 years ago apple was in financial distress, partly because of their failed strategy of not making their products windows compatible. they were losing market share badly to IBM and IBM compatible products and had also lost a series of patent infringement lawsuits against MSFT regarding their graphical user interface. they were on the ropes financially. to rescue themselves apple finally had to make their machines windows compatible and, in a settlement with microsoft related to other pending litigation, obtained from microsoft $150 million of desperately needed capital in exchange for non voting stock. the hated microsoft saved their bacon when they could have helped bury them. but that kind of publicity they didn't need, long having been a target of antitrust regulators. apple went on to bigger and better things only because they were forced to open their sytem up.

    my point is this:

    even the smartest CEOs can make mistakes and fortunes of even the most successful companies can change. capital should always be regarded as a precious resource and should not be squandered away on some lame-thinking CEO ego tripping over his "undervalued"... shares. it's not his job to judge whether his company's shares are undervalued...it's the market's job.

    as for steve jobs, beware investing in any organization that has a cult following, as does apple computer. if you're fortunate enough to get in early it works. if you get in late it doesn't. also beware of mythical CEOs, of whom steve jobs is one. jack welch was one, too, and revisionist historians now regard him as much a cook as a CEO. he did a great job cooking the books at GE when cooking the books was viewed with a wink and a nod. carley fiorna at HP was another smoothe talker with a lame background. she came from a tired, old monopoly business called western electric, which became lucent technologies. remember them? HP finally woke up to her fraud and gave her the well earned boot. i don't, by the way, put jobs on their level...he's better than them. but he's just a talented CEO supported by a lot of people just as smart or smarter than he who are part and parcel to apple's success. he's not a miracle worker.

    if a company wants to return value to shareowners let them pay dividends. buybacks are for idiots who don't understand corporate finance.





    On Jan 01 08:58 PM sepod wrote:

    > AAPL is a textbook case wherein Management can spend $5BB - $10BB
    > buying their shares back without even breaking a sweat. They've been
    > sitting on a rapidly growing stockpile of cash that, as of now has
    > reached $25BB. And the only thing this cash horde gets them is a
    > fabulous balance sheet, besides that, it merely sits there and grows.
    > Yes, they've purchased a few Companies here and there, but that hasn't
    > even dented their pile in the least. The stock is down from 203 approximately
    > a year ago to a current price of 85. What better way to open up the
    > purse strings than to buy their own shares at prices that may never
    > be seen again. C'mon Steve Jobs let's see a share buyback, as that
    > may very well be the impetus that AAPL needs to give it a kick start
    > in the butt, so this wonderful stock can have a price equal to it's
    > greatness. BTW Steve, while you're buying back AAPL shares, how about
    > if you get on the Toob and tell your adoring public that not only
    > are you still alive...but flourishing, as that would add additional
    > credence for a precipitous rise in AAPL shares posthaste.
    Jan 03 00:30 am |Rating: 0 0 |Link to Comment |View article
  • The Lending Lunacy Continues as GMAC Gives Out More Bad Loans
    it doesn't matter to me whether GMAC gives 0 percent loans to unemployed hobos. but it matters a hell of a lot if they do it with public assistance. this country wasn't built on corporate welfare, my friend. and our economic system sure as hell isn't going to be saved by it.

    as for lower income people needing vacations too, why stop there? let's buy em a nice house and pay for their internet and cable tv so they can be connected. we can pay for it with the money tree that grows behind the federal reserve building.







    j





    On Jan 02 08:26 PM jepittman wrote:

    > You have your opinion of what is absurd and I have mine. The Federal
    > Reserve has decided GMAC deserves assistance. That is a fact and
    > my opinion does not matter. Lower income people need automobiles
    > to get to work, support a family, take a vacation, even go to the
    > grocery store. They need reasonable credit to purchase a vehicle,
    > which has a life of many years. Some have suggested that only those
    > with prime credit be afforded credit for cars and trucks. This is
    > what I consider absurd. There are many lenders (GMAC is among them)
    > with vast experience lending to people with credit scores 600 and
    > up. 'Wising up" is recognizing that it is good business for the manufacturer,
    > the supply chain, their employees and the economy as a whole to provide
    > reasonable credit to people who need it for what has become a neccesity
    > in today's society.
    Jan 02 23:19 pm |Rating: +2 0 |Link to Comment |View article
  • First Step to Fix the Markets: Let Shareholders Vote on Buybacks
    by the way....

    i looked at a chart of TESS.....

    at the end of september 1994 the share price stood at $11.33 adjusted for a 3:2 split in nov 06. it reached a high of 31.38 in February 07. it's current price is $8.71. it has never paid a dime in dividends.

    during the 14 year period, the stock had one two year period where it tripled in value before collapsing in price. if you made money that's great. but the stock buyback had utterly nothing to do with it.

    thanks for providing just one more example of ignorant managements squandering precious capital because they think they have an undervalued stock.

    Jan 01 19:42 pm |Rating: 0 0 |Link to Comment |View article
  • First Step to Fix the Markets: Let Shareholders Vote on Buybacks
    i would be willing to bet that for every company that you can find that has "wisely" repurchased shares i could find 5 that did so unwisely. there are two reasons why capital should never....NEVER...be squandered in this fashion:

    1. equity capital...as many ignorant managements and boards are now learning...is a precious and scarce resource. it is the most expensive form of capital and it is not always available when you need it.

    2. management's job is to produce a product or service in a competitive environment. it is not financial engineering. companies who rely on such cheap tactics to raise EPS or boost the stock price too often get what they deserve....higher financial leverage, lower operating leverage and a stock price that goes nowhere. i can cite countless examples of this in recent years...target stores, microsoft, GE, macy's....all of these companies have spent major dollars on share buybacks. many have sucked air for years...and some have engineered themselves into a less competitive financial position.

    as for boards of directors establishing value-based criteria to support buybacks...puhleeze. reread points 1 and 2. that's all they need to know.





    On Jan 01 05:54 PM Tom Armistead wrote:

    > Dan, you have correctly identified a problem that has been going
    > on for years. But there are two sides to the issue.
    >
    > I have owned companies whose management has greatly increased shareholder
    > value by buying shares at discount prices, specifically Tessco (TESS).
    >
    >
    > I can't remember the name but there was one company where the board
    > establisehd value-based criteria to determine when buybacks were
    > in the best interest of shareholders. The requirement of such criteria
    > would improve corporate governance.
    >
    > As a thought, many companies are now trading under tangible book
    > value per share: if the cash is available buybacks make a lot of
    > sense under those conditions. Examples would be MBI and HTCH. <br/>
    >
    > So from my perspective a good solution would be to require boards
    > to establish definite value-based criteria to support any buyback
    > authorization.
    Jan 01 19:23 pm |Rating: 0 0 |Link to Comment |View article
  • The Lending Lunacy Continues as GMAC Gives Out More Bad Loans
    good grief...

    here's what's absurd on it's face.....thinking that it is normal and proper for any financial institution to continue to operate when it has squandered it's own capital on credit losses and comes hat in hand to taxpayers asking for more....

    GMAC, like general motors which spawned it, would be flat out bankrupt without taxpayer handouts. so would every major financial institution in this country. whose fault is that?

    wise up.

    On Jan 01 01:25 PM jepittman wrote:

    > IMO there is nothing wrong with providing credit to these people
    > as long as the credit is priced properly, and if packaged and sold,
    > is presented as what it is. There will always be delinquencies and
    > defaults but if priced and managed by experienced lenders many responsible
    > people benefit from having access to the credit as do employees and
    > security holders of the many organizations that provide the product
    > sold. To suggest that ONLY those with prime credit ratings have access
    > to credit is IMO absurd on its face.
    Jan 01 14:09 pm |Rating: +4 0 |Link to Comment |View article
  • First Step to Fix the Markets: Let Shareholders Vote on Buybacks
    i never buy companies that squander capital by buying back their own shares. it shrinks the capital base and leverages the business. those who do so are not fit to run companies. those who believe this is a good way to "return" money to shareholders are simply ignorant.
    Jan 01 13:32 pm |Rating: 0 0 |Link to Comment |View article
  • What Do We Need In 2009? More Failure
    the u.s. financial system is a house of cards...a ponzi scheme based on cheap and plentiful credit. instead of acknowledging that as a tragic flaw, both the federal reserve and the treasury are embracing it because they perceive the alternative...which is massive failures and global depression...to be much worse. it would, of course, be worse in the short run, hence they do the one thing they are good at...shoveling more money and cheap credit into the system to prop it up. in doing so, they are inhibiting a healthier, more stable financial system to emerge from the wreckage.

    federal efforts to prop up our dysfunctional financial system have merely delayed the inevitable. it is encouraging that banks and consumers have so far refused to play along with their ponzi scheme. capital-constrained banks have gotten religion and won't lend to consumers and/or commercial borrowers who are risky credits in the midst of a declining economy; and those financially healthy enough to borrow neither need or want the credit when returns on incremental borrowing are uncertain, i.e. why buy a house when prices are declining and jobs are disappearing, and why build a new plant in the face of weakening demand for virtually all products and services?. both are acting rationally, in contrast to the fed and the treasury, whose actions are directly contrary to the long term interests of the country.

    let it burn.
    Jan 01 12:03 pm |Rating: +4 -1 |Link to Comment |View article
  • The Fed's Big Gamble
    "However, if the economy starts to stabilize, the Fed will have to just as aggressively drain this liquidity out of the system. It will have to do so when the economic picture is at its bleakest (we are not there yet -- not by a long shot). If it doesn't, the risk of very high inflation (much higher than Ford/Carter levels) is huge."

    there is a simple but fundamental truth here. inflation is not a hindrance to a debtor nation...indeed, inflation is the debtor's friend. now you tell me....do you really think our federal reserve has any intention of reversing it's easy money policies that they and the treasury have deemed our economic lifeblood?

    our country can't seem to function without cheap credit for everyone...deadbeats included. unless forced to reign it in by our foreign creditors, cheap money and easy credit policies are here to stay.

    china and japan will have more to say about our economic future than our federal reserve.


    Dec 31 22:27 pm |Rating: +4 0 |Link to Comment |View article

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