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The Science of Hitting
The Science of Hitting
Articles (451) 

Share Buy Backs a Waste of Money? Come on Cramer... (COST)

December 14, 2011 | About:

On Tuesday, Jim Cramer had this to say during a CNBC interview: “One of the worst wastes of money we have ever seen in this era is the buyback; it’s precisely not what helps shareholders…”

Certainly he has a point in some cases; of course, companies make acquisitions that waste money, pay dividends when they shouldn’t, and commit plenty of other capital allocation errors that should be avoided. Instead of actually explaining WHY buybacks don’t make sense IN CERTAIN SITUATIONS (which I would assume Cramer understands), he simply skirts along with this blanket statement and offers no explanation as to why.

In the next couple of minutes, Cramer then has this to say:

“It’s a way to fool the compensation committee… you build up earnings per share, allows you to get a better bonus, completely corrupt system that we all endorse. Why do we endorse it? Because I think analysts go along with it, there are very few people who publicly speak for the people who are shareholders… these are all just gimmicks.”

Of the people who do speak publicly about it, I would think that the host of a prime-time show on a financial network who speaks to CEOs on public television nightly could find the time to ask the simple question: why?

Take, for example, Costco (NASDAQ:COST); in the past two years, the company has repurchased nearly $1.2 billion of their own stock, compared to $2.7 billion in profits over that same time period. Considering that management has spent more than 40% of earnings over the past two years on repurchases, wouldn’t it seem like something worth asking about? Instead, Cramer asked:

“You have 64 million cardholders; are there more people who can be cardholders?”

“You want to open stores until you don’t have long lines; I have long lines at all my Costcos, is that a sign that we need more Costcos?”

“How many $200,000 diamonds do you think you can sell in a year?”

“What’s the hot item right now? What are you predicting will be the hot item for the holidays?”

Those questions aren’t too tough or too informative for shareholders, Mr. Cramer; maybe that’s part of the reason why CEOs get away with it… but hey, at least we’ll know what the cool toy of 2011 will be.



About the author:

The Science of Hitting
I'm a value investor with a long-term focus. As it relates to portfolio construction, my goal is to make a small number of meaningful decisions a year. In the words of Charlie Munger, my preferred approach to investing is "patience followed by pretty aggressive conduct". I run a concentrated portfolio, with a handful of equities accounting for the majority of its value. In the eyes of a businessman, I believe this is sufficient diversification.

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