Tag Archives: stock buybacks

Does a long-term view really pay off?

by Cydney Posner

In this February 2017 article in the Harvard Business Review, “Finally, Evidence That Managing for the Long Term Pays Off,” a team from McKinsey and associated consultants attempt to prove empirically what has often seemed intuitively must be true — that companies that manage for long-term value creation, those that can put aside the pressures of quarterly expectations, actually deliver superior results.  What did they find? That if the whole economy had performed at the same level as the companies in their study that followed a long-term strategy, “U.S. GDP over the past decade might well have grown by an additional $1 trillion [and the economy would have] generated more than five million additional jobs over this period.” Continue reading

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Shareholder proposals to exclude the impact of buybacks from executive comp metrics — will they become a new trend?

by Cydney Posner

A recurring demand by hedge funds activists is that the target company return capital to its shareholders by buying back its own stock. Data compiled by S&P and Bloomberg shows that companies in the S&P 500 spent 95% of their earnings on repurchases and dividends in 2014, including spending $553 billion on stock buybacks. But, in some cases, conducting a stock buyback can be an ultimatum with which company executives are actually happy to comply. Why? One of the more appealing consequences of the buyback trend for company executives is that, in some cases where compensation performance metrics are stock-price- or EPS-related, buybacks can juice executive compensation, irrespective of the operational success of the company. Now, some governance activists are beginning to challenge whether that favorable consequence should be curtailed. Continue reading

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Will more regulation be imposed on stock buybacks?

by Cydney Posner

Lots of companies have been buying back their stock in recent years, either on their own initiative because, for example, management thinks the shares are undervalued, or sometimes at the insistence of  hedge fund activists bent on increasing the market price of the shares.   Now, as discussed in this NYT DealBook article, an issue that not so long ago was an obvious non-starter has suddenly gained some legitimacy: is the government going to make open-market stock buybacks illegal or perhaps impose more onerous regulation on them? Continue reading

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They spurred the stock buyback phenomenon. Will hedge fund activists now eviscerate R&D?

by Cydney Posner

It is widely recognized that one of the primary causes of the current stock buyback phenomenon has been pressure from hedge fund activists. But, as suggested in this NYT DealBook column, the activist playbook is certainly not limited to buybacks and dividends: “[a]s activist hedge funds take aim at companies left and right from their spreadsheet-laden war rooms in Manhattan’s glass towers, their expertise is financial engineering, not running companies. And so the activists love to argue for sales, split-ups, stock buybacks and other financial machinations. The idea is that a quick financial event is more likely to generate immediate returns than the harder and longer-term work of building value.”

Trend spotters have observed that one of the first victims of these “financial machinations” appears to be R&D spending. As reported in this post by Professor John Coffee, that observation finds support in a recent study. Looking at campaigns launched by activist hedge funds, the “study finds that even those targets that escape a takeover still are forced to curtail their R&D expenditures by more than half over the next four years.” Coffee speculates that companies actually “acquired as a result of an activist campaign probably experienced an even greater decline.” In contrast, the study showed that R&D expenditures for a matched control group rose modestly over the same period.  “Presumably,” Coffee observes, “it is self-evident that if an economy cuts back drastically on its investment in ‘R&D,’ it will experience less innovation and technological advances in the future…. That should be a cause for concern.”  Continue reading

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Senator urges SEC to revisit rules and policies on stock buybacks

by Cydney Posner

Data compiled by S&P and Bloomberg shows that companies in the S&P 500 spent 95% of their earnings on repurchases and dividends in 2014, including spending $553 billion on stock buybacks in 2014. The number was $1 trillion for 2013 and 2014, the biggest two-year total ever (well, really since 1998, when they started reviewing the data for the study.) As it turns out, stock buybacks may, in part, be fueling the recent bull market.  Indeed, this article from Bloomberg asserts that the “biggest source of fresh cash in American equities isn’t speculators or exchange-traded funds — it’s companies buying their own stock, by a 6-to-1 margin….Repurchases by U.S. companies averaged $46.1 billion a month in 2014, compared with $7.1 billion in ETF and fund inflows.”

Now, as reported in this article in the International Business Times, some members of Congress have begun to pay attention to the issue. Wisconsin Senator Tammy Baldwin has sent a letter to the Chair of the SEC requesting that the agency revisit the rules on stock buybacks. In 1982, when the Rule 10b-18 safe harbor for buybacks was adopted by the SEC, the Senator observes, “buybacks were near zero. Last year, over $500 billion was spent on share repurchases.” In her letter, Baldwin requested that the SEC, provide “any analytic work done by the SEC on the long-­term economic impact of the 1982 rule; an accounting of all investigations undertaken by the SEC into possible violations of the rule; and, an assessment of whether this rule is adequate for the SEC’s stated mission — to foster capital formation and prevent fraud.”  Continue reading

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Are stock buybacks hurting the economy?

by Cydney Posner

According to “Companies’ Stock Buybacks Help Buoy the Market,” by Dan Strumpf, published in the WSJ on September 15, 2014, “[c]ompanies are buying their own shares at the briskest clip since the financial crisis, helping fuel a stock rally amid a broad trading slowdown. Corporations bought back $338.3 billion of stock in the first half of the year, the most for any six-month period since 2007, according to [a] research firm….. Through August, 740 firms have authorized repurchase programs, the most since 2008.”  (According to this later piece in the WSJ, there was apparently some tailing off in Q2.)

But are stock buybacks necessarily a good thing? As noted in the WSJ, some “investors applaud repurchases as an appropriate way to return cash to shareholders by buying their stock or putting excess funds to work, akin to dividends but without the tax bite for shareholders. However, in “Share Buybacks Slow as Scrutiny Rises,”  published in Institutional Investor on September 19, 2014, S.L. Mintz observes that shareholders are no longer reflexively praising buybacks.  The article describes an analyst conference call during which a major corporation announced a substantial share buyback program. Instead of the anticipated silence or benign comments, the announcement was met with a flurry of probing questions about the company’s motivation and expectations, the potential effect on alternative uses of capital, growth and net income, and  the analysis behind the target level of leverage.  A few days later, S&P downgraded the company’s debt.

As that conference call would suggest, the critics of stock buybacks seem to be having some impact. Critics of stock buybacks are many and, as The Economist observes in “The repurchase revolution,” published on September 13, 2014, they tend to sort themselves into two camps: “Some view buy-backs as a form of financial sorcery, on a par with all those abstruse credit derivatives that helped cause the financial crisis. Others accept that buy-backs are a legitimate way to return cash to shareholders but worry about their extent. They fear they have become a kind of corporate cocaine that induces a temporary feeling of invincibility but masks weakness and vacuity. They worry the boom will damage firms and the economy.”

In “Profits without Prosperity,” published in the September 2014 Harvard Business Review, Prof. William Lazonick plants his feet firmly in both camps, attributing everything from slow economic growth to job instability and income inequality to the scourge of stock buybacks. Depending on your point of view, he may have a point. Continue reading

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