In Yahoo, Another
Example of the Buyback Mirage
Marissa Mayer, chief executive of
Credit Ramin Rahimian for The New York Times
It is one of the great investment conundrums of our time: Why do so
many stockholders cheer when a company announces that it’s buying back
repurchase programs can be hazardous to a company’s long-term financial health
and often signal a management that has run out of better ways to invest in the
column from Gretchen Morgenson examining the world of finance
and its impact on investors, workers and families
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yet, investors love them.
Not all stock
repurchases are bad, of course. But given the enormous popularity of buybacks
nowadays, those that are harmful probably outnumber the beneficial.
Those who run companies like buybacks because they make their earnings
look better on a per-share basis. When fewer shares are outstanding,
each one technically earns more.
But a company’s
overall profit growth is unaffected by share buybacks. And comparing increases
in earnings per share with real profit growth reveals the impact that buybacks
have on that particular measure. Call it the buyback mirage.
Yahoo. The company has bought back shares
worth $6.6 billion between 2008 through 2014, according to Robert L. Colby, a
retired investment professional and developer of
an equity valuation service used by institutional investors. These purchases
helped increase Yahoo’s earnings per share about 16 percent annually, on
But a good bit
of that performance was the buyback mirage. Growth in Yahoo’s overall net
profits came in at about 11 percent annually.
figures, Mr. Colby reckoned that Yahoo, if it had invested that same amount of
money in its operations, would have had to generate only a 3.2 percent after-tax
return to produce overall net profit growth of 16 percent annually over those
argue that the money they spend repurchasing stock is a shrewd use of their
capital. And given Yahoo’s track record in recent years, its management team
seems to have had a hard time identifying profitable investments.
But Mr. Colby
pointed out that buybacks provide only a one-time benefit, while smart
investments in a company’s operations can generate years of gains.
Yahoo did not
reply to an email seeking comment about its buybacks.
may be of interest to Starboard Value L.P., an activist investor that is a large
and unhappy Yahoo shareholder. On Thursday, Starboard nominated nine directors
to replace the company’s entire board, saying its current members lack “the
leadership, objectivity and perspective needed to make decisions that are in the
best interests of shareholders.”
In a statement,
Yahoo said: “The board’s nominating and governance committee will review
Starboard’s proposed director nominees and respond in due course.”
Yahoo is not
alone. Mr. Colby conducted a cost-benefit
analysis of 26 companies buying back stock
versus using that money to invest in a business.
He found that
McDonald’s was another problematic example. Since 2008, McDonald’s has allocated
almost $18 billion to buybacks. This has helped to produce 4.4 percent increases
in annual earnings per share over the period. To equal that growth in overall
earnings, the company would have had to generate just a 2.3 percent return on
the money it spent buying back stock, Mr. Colby estimated.
Moody’s Investors Service downgraded McDonald’s unsecured debt rating, citing
plans to increase its borrowings in part to
fund future buybacks.
Becca Hary, a
McDonald’s spokeswoman, said the company had a “balanced and disciplined
capital-allocation strategy that promotes long-term value for our shareholders.”
She cited McDonald’s plans to invest $2 billion to open a thousand new
restaurants and “to reimage 400 to 500 locations” domestically.
In an interview,
Mr. Colby said his research “confirms my suspicion that while buybacks are not
universally bad, they are being practiced far more broadly and without as much
analysis as there should be.”
crucial flaw in buybacks is that they reward sellers of a company’s stock over
its long-term holders. That’s because a company announcing a repurchase program
usually sees its stock price pop in the short term. But passive investors, such
as index funds, and other long-term holders gain little from the programs.
problematic are buybacks financed with borrowed money; repurchases of stock made
at prices above its intrinsic value are also dumb.
companies that spend billions to repurchase stock without substantially
shrinking the number of shares outstanding. In these circumstances, prized
corporate cash is used to offset stock grants bestowed on company executives in
rich compensation plans.
And there are
plenty of companies whose buybacks have simply left them with less money to
invest in more promising opportunities.
away money on buybacks, companies are giving up on the ability to grow in the
future,” said Michael Lebowitz, an investment consultant and macrostrategist at
Global in Chevy Chase, Md.
At last, some
investors are stirring on this issue.
Domini Funds, a mutual fund company, and
A.F.L.-C.I.O.’s investment funds have
submitted shareholder resolutions on share buybacks at
3M, Illinois Toolworks, Target and Xerox
ask the companies to adopt a policy of excluding the effect of stock buybacks
from any performance metrics they use to determine
executive pay packages.
against buybacks,” said Adam M. Kanzer, a managing director at Domini. “The
question is at what point do buybacks become excessive and when do they
undermine the long-term value of the company?”
At 3M, for
example, research and development expenditures plus strategic acquisitions have
totaled $22 billion over the last five years, Mr. Kanzer said. In the meantime,
the company’s buyback program has cost $21 billion.
buyback almost equals all the other expenditures, it makes sense to ask
questions about whether there’s a more constructive way to invest that capital,”
Mr. Kanzer said.
these questions, Lori Anderson, a 3M spokeswoman, referred me to the company’s
proxy filing, which stated: “We believe these concerns are unfounded, as
demonstrated by our long-term track record and our balanced capital-allocation
A group of
institutional investors will also convene soon to examine the pros and cons of
Shareholder Forum, which conducts
independent programs to provide information that helps investors make sound
decisions, is starting a new program on the topic.
“You really have
to ask why a company’s board decides to return a big chunk of capital instead of
replacing managers with ones who can figure out how to develop the operations,”
said Gary Lutin, who oversees the Shareholder Forum.
“If the board
doesn’t think it’s worth investing in the company’s future,” Mr. Lutin added,
“how can a shareholder justify continuing to hold the stock, or voting for
directors who’ve given up?”
A version of this article appears in print on March 27, 2016, on page
BU1 of the National edition with the headline: Sacrificing The Future
For a Mirage.
© 2016 The
New York Times Company