Corporate Buybacks Don't Always Mean Higher Share Prices

When Apple (AAPL, Financial) CEO Tim Cook announced the company will use a sizeable portion of its over $269 billion in repatriated earnings for an aggressive, accelerated share repurchase plan, shareholders were positively giddy. A review of Apple’s stock price over the past year indicates their jubilation was warranted.

The rationale for share repurchases is that a reduction in the number of shares outstanding will increase a company’s earnings per share, which the market will view favorably by boosting its stock price.

S&P 500 companies are slated to repurchase over $800 billion worth of their shares this year, a record that eclipses the last buyback frenzy that occurred in 2007. In addition to Apple, other big share repurchasers include Oracle Corp. (ORCL, Financial), Bank of America (BAC, Financial) and JPMorgan Chase (JPM, Financial).

A perusal of the increase in the S&P 500 year to date shows it rose in tandem with the massive infusion of cash from the corporate repatriation of earnings that prompted the record amount of buybacks. It is generally accepted that the market’s stability during this period is attributable, to some degree, to the implementation of unprecedented and aggressive corporate buyback programs.

But can stockholders always expect share prices to rise after a company repurchases its own shares? Many investors seem to believe buybacks inexorably will lead to increased share prices. A review of companies' track records with buybacks, however, will prove instructive and should act to disabuse those who contend share repurchases and stock price increases always go hand in hand.

Data for 2018 is revealing.

Of the 350 companies in the S&P 500 that have repurchased shares so far this year, approximately 57% are actually trailing the index’s 3.2% rise. This is a rather dismal showing and is the highest shortfall percentage of companies that failed to match the indexes since the beginning of the 2008 financial crisis. This seems to put the lie to the idea that buybacks always boost the share price.

Analysis of another index of buyback performance seems to confirm that returns from repurchases for a sizeable portion of the corporations that comprise the index have been lackluster. The S&P 500 Buyback measure, which tracks the performance of the 100 biggest stock repurchasers, showed a tepid gain of only 1.3% this year, well below the gain in the S&P 500.

Although the anticipated return on investment for S&P 500 companies that have repurchased shares is expected to be approximately 6.4%, this still falls below the past six rolling five-year periods as measured by Fortuna Advisors, a consulting firm that has examined buyback trends going back to 2007.

The verdict? Share repurchases by many companies over the past 18 months have led to uninspiring stock price increases.

One factor of paramount importance that impacts the relationship between a company’s buyback program and its resultant stock price is fortuitous timing. Just because a company is buying back its own shares doesn’t make the post-repurchase stock price immune from the ordinary effects of injudicious market timing that plagues every individual investor. Often times, the executive charged with executing the repurchases guesses wrong and becomes a casualty in the dreaded buy high, sell low scenario.

It should come as no surprise the decision to buy back shares in the period immediately following the 2008 market crash was clearly auspicious, as share prices were severely depressed. As the 10-year bull market started its run, this decision was beneficial to shareholders and the company’s enhanced earnings per share.

In contrast, untimely share repurchases can lead to disastrous results. In 2007, Microsoft (MSFT, Financial), IBM (IBM, Financial) and Exxon Mobil (XOM, Financial) each spent more than $18 billion to repurchase stock, only to see share prices plummet precipitously a year later when the financial crisis arose.

Some investors worry many corporations now are repeating the same mistakes of the past by purchasing their shares at the end or top of one of the longest-running bull markets in history.

Some of the large-cap companies that have seen exceptionally poor results on their share repurchase investments in 2018 are:

Additionally, some companies spend a disproportionate amount on buybacks. There are other factors that effect a company’s stock price, such as dividend payout ratio and reinvestment of earnings, which for some companies may have more of an impact on the long-term price of the stock than share repurchases.

One of the reasons Apple shareholders have fared so well this year is the company showered stockholders with generous dividend increases at the same time it was removing outstanding shares.

Additionally, in the case of Apple, one of the reasons the stock price rose was undoubtedly due to the sheer scope of the repurchase program. But the company also continued to record robust sales and earnings growth concomitant with the buybacks. Apple has repurchased $22.8 billion worth of its shares year to date. Over the same period, its stock price has increased by 11%, with much of the gain coming on the heels of strong revenue and sales profit in the second quarter.

The conclusion? The number of instances where buybacks resulted favorably in share price appreciation is a mixed bag. Stock prices are susceptible to other factors that are unforeseeable and may have more of an effect on share prices than a reduction in outstanding shares.

Disclosure: I have no positions in any of the securities referenced in this article.