Stock Buybacks That Hurt Shareholders
JUNE 5, 2015
in a stock buyback binge. Companies are tripping over themselves to
repurchase their own shares this year, and most investors see this as
not all of these buyback programs wind up benefiting shareholders. In
fact, some can be quite costly and destroy value rather than create
positive side, companies that buy back shares reduce the amount of
stock they have outstanding. This has the effect of increasing
earnings per share and the stakes of existing shareholders. That’s why
many investors have been pushing for buybacks, especially at companies
sitting on mountains of cash.
column from Gretchen Morgenson examining the world of finance
and its impact on investors, workers and families
See More »
Steven Mollenkopf, chief of
Qualcomm. In the last five years, the company’s share buybacks
have resulted in a net transfer from shareholders of more than
Credit Steve Marcus/Reuters
calls are being heeded. April was the biggest month ever for buyback
announcements — $141 billion, according to data compiled by Rob
Leiphart at Birinyi Associates. If these buyback plans continue at the
current rate, they will reach $1.1 trillion this year, he said, well
above the peak of $863 billion in repurchase announcements in 2007. In
April, Apple and General Electric announced $50 billion programs. In
February, Home Depot said it would buy back $18 billion of its stock,
and Gilead Sciences chimed in with a $15 billion plan. Also in
February, PepsiCo announced a $12 billion program.
best buybacks occur at companies that have concluded — after careful
analysis — that their stocks are cheap and that purchasing them is a
wise use of their capital. But veteran investors warn that companies
must combine stock repurchases with other steps if they want to unlock
value in their operations.
Problems emerge when companies spend billions of stockholders’ dollars
repurchasing shares with little to no effect on the amount of stock
that remains outstanding. This can happen when they are buying back
shares with one hand and, with the other, issuing stock options or
restricted shares to executives and other employees as part of their
Consider Qualcomm, a maker of digital wireless communications
equipment. Over its last five fiscal years, Qualcomm has been a big
buyer of its own shares. Financial filings show that it has
repurchased 238 million shares at a cost of $13.6 billion.
might think a buyback program of that size would have diminished the
total share count. In fact, Qualcomm’s average diluted share count has
actually increased over the period by almost 41 million shares. That’s
a 2 percent rise since 2010.
this possible? Mainly it’s because the company has been granting a
treasure trove of stock and option awards to its executives and other
employees over the last five years. In that period, Qualcomm’s
financial statements show, the company issued 97 million shares to
cover these grants. Two-thirds of the shares were restricted stock
units; the remainder consisted of stock options.
prices Qualcomm paid to buy back shares and the prices at which it
issued them to executives and other employees raise an interesting and
troubling question for shareholders.
Financial filings show that Qualcomm paid an average of $56.14 a share
to buy back stock that is now priced at around $69. That may look like
a good deal for shareholders. But wait.
Calculate the costs of Qualcomm’s stock-based compensation and it
turns out that the company was issuing shares at an average price of
$53.54 during that period. On the 97 million options and restricted
shares granted by the company over the last five years, that $2.60
difference represents a net transfer from shareholders of more than
$250 million. Other dilution created by past grants would increase
that figure to $600 million or more.
Davis, chief financial officer of Qualcomm, acknowledged that its
return of capital to shareholders in recent years had trailed that of
its peers. “We were coming out of a period where the company went
through a very rapid growth phase and the focus really was on
executing well,” he said in an interview on Thursday. “As the growth
normalized, we saw that we had some catch-up to do, both on the
dividend and on share repurchases.”
catch-up has begun to take effect, he said, and the share count fell
2.7 percent this year. “We felt at a minimum that we should be
nondilutive,” he said.
Qualcomm has told investors that its new buybacks supplement a plan to
return 75 percent of its free cash flow to shareholders through stock
repurchases and dividends in the coming years.
Qualcomm shareholders should pay close attention to the impact the
company’s stock and option grants have on its share repurchase
programs. That scrutiny is important for two reasons.
the company is bounteous in its executive pay practices — Steven M.
Mollenkopf, who became chief executive last year, was
the eighth-highest-paid C.E.O.
the top 200 companies in the
United States in 2014, according to Equilar, a compensation analysis
firm in Redwood City, Calif. His $60.7 million package included $58
million worth of stock.
the last five years at Qualcomm, Mr. Mollenkopf has received $105
million in total compensation, Equilar said.
Second, Qualcomm has been excluding the costs of its generous
share-based compensation from the financial results it uses to measure
executives’ performance for pay purposes. These are not insignificant
sums: Over the past three years, the compensation cost excluded from
the incentive pay calculation has totaled $3.2 billion, the company
proxy shows. (These figures represent the value of the grants on the
date they were given and include shares that have not yet vested.)
Qualcomm included share-based compensation in one of the figures it
uses to measure executive performance — a version of operating income
that excludes certain expenses — that number would have been 12
percent lower last year. And that would clearly have diminished its
top executives’ pay.
March, Qualcomm announced that it was almost doubling its share
buyback program to $15 billion; $10 billion of that is supposed to be
purchased by March 2016. It borrowed $10 billion in the public debt
markets in May to pay for these buybacks, the company said.
Qualcomm’s new program appears to be a response to some of the
company’s larger shareholders who have criticized its management. And
it may very well be a step in the right direction. But as the company
executes the buybacks, shareholders will want to ensure that they reap
the full benefits of them. Stock buybacks may look appealing, but they
are not all created equal.
A version of this article appears in print on June 7, 2015, on page
BU1 of the New York edition with the headline: Buybacks That Hurt
© 2015 The
New York Times Company