By Jeff Reeves at MarketWatch
Another earnings season, another load of massive stock-buyback announcements.
In the past few weeks alone, we saw:
• A $4 billion boost to General Motors’ GM, +0.57% stock-buyback plan, bringing the total $9 billion.
• A new $4 billion buyback plan from MasterCard MA, -0.84%
• A new $10 billion buyback program at battered oil company Schlumberger SLB, -2.30%
The repurchase amounts are big, and they are only getting bigger.
“Among the 1,900 companies that have repurchased their shares since 2010, buybacks and dividends amounted to 113% of their capital spending, compared with 60% in 2000 and 38% in 1990,” Reuters said in a recent special report on the buyback craze.
You would think that with all that cash being plowed into stock buybacks, investors would be reaping the rewards. But, sadly, more often than not, the buybacks are simply a waste of money as shares are bought at inflated values, diluted by employee stock awards and ultimately come at the cost of growth and innovation.
Here’s why stock repurchases are good for nothing, and why companies like Apple AAPL, -1.04% Cisco CSCO, -1.95% and IBM IBM, +0.16% need to wake up and stop wasting their money on buyback boondoggles.
Stock buybacks are often ill-timed
Amusingly, corporations frequently embark on massive buyback schemes after they have seen big growth, not before. That means they are particularly susceptible to buying shares at a peak.
And when you’re deploying billions of dollars, paying even just a 5% or 10% premium can add up to serious waste.
A great example is Apple, which tried to appease Wall Street as its growth slowed in 2012 by announcing a stock-buyback plan. And it began that mission by spending almost $2 billion between Sept. 30 and Nov. 3, 2012, in the range of $80 to $90 a share (adjusted for splits).
Apple then proceeded to crash to as low as the $50s in 2013, and didn’t reclaim the $90 mark until mid-2014.
Now, the buyback bulls may assert that Apple wisely kept the pedal down across these lows to keep buying its shares at what is roughly half the current share price. However, that’s hardly a defense considering Apple’s stock has gone basically nowhere since the start of this aggressive buyback plan; the shares are falling close to $90, where Apple was after launching the scheme back in 2012.
And by the way, that includes a $6 billion accelerated share repurchase in May 2015 at an average price of $124.24 — on top of $7 billion spent in the fiscal second quarter of 2015 for an average price of $124.11, and $4 billion spent in the fiscal third quarter of 2015 for an average price of $128.08!
That’s a 30% premium from current prices that investors may not see again in 2016 after a rather ugly first-quarter earnings report.
As Warren Buffett famously said in his 2012 letter to Berkshire Hathaway shareholders: “In repurchase decisions, price is all-important. Value is destroyed when purchases are made above intrinsic value.”
Apple apparently hasn’t gotten that memo.