Stocks with aggressive buyback programs have little or nothing to show for the money they spent.
Many public companies continued to buyback their shares at a very high level as indicated in this Factset chart
http://www.factset.com/websitefiles/PDFs/buyback/buyback_9.21.15
We compared the stocks in the S&P 500 Buyback ETF (SPYB), of which we cover 66 out of 100, to our universe of approximately 500 stocks to evaluate what they achieved for the money they have spent.
The bottom line is that it appears that the buyback programs have bought very little benefit, if any.
This table compares the median values of the SPYB stocks to our Universe.
First, the SPYB stocks are undervalued by 7% as indicated by VR or Valuation Return/Risk. What is the point of spending money to goose your stock price if your stock is remains undervalued ?
Their growth rate (RR, or Reinvest Return) is a percentage point better than average but this likely is entirely attributable to the deductions from book value due to buying back shares above book value (its called 'decimating the denominator' and is good for executive compensation bonuses).
Their growth rate (RR, or Reinvest Return) is a percentage point better than average but this likely is entirely attributable to the deductions from book value due to buying back shares above book value (its called 'decimating the denominator' and is good for executive compensation bonuses).
Not shown in the table are the median P/Es which are 13.1x vs 15.1x for the universe!
The result of the higher return and lower P/E is a shorter Payback (PB) for the Buyback stocks, i.e.8.0 vs 8.5 years. These stocks are cheaper!
It is interested to note that the median target Payback (NM) for all stocks is 103% of the S&P 500's while the Buyback stocks' target is only 95% which suggests lower long term valuations.
The result of the higher return and lower P/E is a shorter Payback (PB) for the Buyback stocks, i.e.8.0 vs 8.5 years. These stocks are cheaper!
It is interested to note that the median target Payback (NM) for all stocks is 103% of the S&P 500's while the Buyback stocks' target is only 95% which suggests lower long term valuations.
Finally, it is worth noting that the median market cap of the buyback stocks is double that of the and is just over the line into the 4th quartile. As shown in the preceding post, the 4th quartile market caps have a slightly negative VR so it can't be argued that the lack of demonstrable benefit from the buyback programs is attributable to being big caps.
In short there is no evidence here that they have achieved any benefit from spending all that money on buying back their stock.
One argument in favor of buyback programs is that the reduction in shares leads to higher eps growth and, hopefully, higher stock prices. However, this isn't working right now. This Yahoo graph shows that the SPYB ETF has underperformed the S&P 500 by close to 6% in the last 6 months.
October 29th Addendum: Performance
One argument in favor of buyback programs is that the reduction in shares leads to higher eps growth and, hopefully, higher stock prices. However, this isn't working right now. This Yahoo graph shows that the SPYB ETF has underperformed the S&P 500 by close to 6% in the last 6 months.
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