Stock buyback plans do little for
Corporate execs, activist
investors get the biggest bang from repurchase plans
Mar 28, 2016 @ 1:25 pm
Stubbornly low interest rates and a struggling U.S. economy have left
a lot of companies with limited options for growth, which helps
explain the continued reliance on stock repurchase plans to push share
a commonly used and often controversial means of boosting both share
prices and earnings-per share, but the trend of buying back shares is
real and likely to continue.
is becoming a major issue is the number of companies buying back more
than they need and reducing shares significantly, by more than 4%,”
said Howard Silverblatt, senior index analyst at S&P Capital IQ.
end of 2015, the cash sitting on the balance sheets of the companies
making up the S&P 500 Index was at $1.326 trillion, which is just shy
of the record $1.333 trillion reached in 2014.
Because that cash is earning next to nothing, there is pressure from
shareholders to put the money to work either in the form of capital
expenditures, acquisitions, dividend payments, or stock repurchase
fact that companies are leaning more heavily on stock buyback plans
says a lot about what they see in terms of an economic outlook, and
influence of short-term
investors, such as activist shareholders.
is a healthy thing to have on a balance sheet, but right now companies
are not seeing any capital investment opportunities,” said Paul
DeNicola, managing director with PwC's governance insights center.
is some pretty aggressive shareholder activism out there, and they
want the cash returned to shareholders, one way or another,” he added.
According to Mr. Silverblatt, over each of the last eight quarters,
20% of S&P 500 companies reduced their share count by at least 4%, and
in the final quarter of 2015, 25% of companies met that mark.
too early to know what the count will look like for the quarter ending
March 31, but Mr. Silverblatt believes the pattern will continue
because it has become one of the most dependable ways of propping up
earnings per share, because reducing the number of shares spreads the
earnings over fewer shares.
it's hard to argue against a strategy that boosts share prices and
earnings per share,
the practice is raising concerns
about the short-term versus long-term benefits, and whether it is a
strategy that favors corporate executives most of all.
investor, you're only impacted by an increase in the stock price if
you decide to sell your shares, because there's no proof that
long-term investors see the same benefits as short-term investors,”
said Mr. DeNicola. “We know that the average holding period for a
significant number of activists investors is less than two years,
because their investments tend to be short-term focused.”
as the pace of
stock buybacks shows no sign of
slowing down, there might be some growing resistance
from institutional-class investors who are growing tired of the
“There's been a significant change in attitude toward buybacks from
institutional investors, because we're seeing a real preference for
some of these companies to put their money back to work as opposed to
just buying back shares,” said Bob Rice, chief investment strategist
at Tangent Capital.
of what Mr. Rice described as a “sea change” from institutional
investors has to do with the way corporate executives might be
benefitting from the buyback programs.
pretty insidious by my way of thinking,” he added. “The executives
stand to gain from the buybacks, because as the number of shares
outstanding shrinks, the earnings per share goes up and that's where
their bonuses are typically tied. It's a hell of a lot easier to buy
back stock then it is to build a business.”
Heckman, senior fixed-income strategist at
U.S. Bank Wealth
Management, also expects institutional investors to put some pressure
on repurchase programs.
“Companies are starting to be a little more discriminate about these
buybacks, because sometimes the companies that do the most buybacks
are not the best-performing stocks,” he said. “In a slow or no-growth
environment it might be the best option companies have, but a lot of
companies have been fairly broad in their use of buybacks and I think
the market is starting to question that wisdom.”
are at least three exchange-traded funds designed to take advantage of
stock-price movements pegged to share buyback plans.
AdvisorShares TrimTabs Float Shrink (TTFS), PowerShares Buyback
Achievers (PKW), and SPDR S&P 500 Buyback (SPYB) each represent ways
investors and financial advisers can passively participate in the
Rosenbluth, director of mutual fund and ETF research at S&P Capital
IQ, explained that the buyback ETFs are a good way to track the
activity because they are managed based on corporate actions, as
opposed to announcements of repurchase plans that don't always lead to
“Announcing a buyback isn't necessarily a buyback,” he said. “A
company is really just announcing a program that gives them the
authorization to buy back stock.”