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Stock Buybacks are Disappointing... or Worse

One of the topics that has drawn negative comments in my direction are my concerns about stock buybacks and how they are not in the best interests of shareholders in the long run.

By Dr. Joe Webb
Published: November 20, 2007

One of the topics that has drawn negative comments in my direction are my concerns about stock buybacks and how they are not in the best interests of shareholders in the long run. This form of price manipulation increases the earnings per share of companies, giving the illusion of improved financial performance to those who might not have the wisdom or ability to dig deeper into the history of the numbers of shares offered. It also implies that the company has exhausted its compelling ideas about where to better invest excess cash. If there is so much cash, giving it to shareholders in the form of a special dividend is clear and less open to the fluctuations of the marketplace. In most cases, holding onto the cash for potential acquisitions, future investments in research & development in areas not yet apparent, or to withstand market downturns might be a much better use of funds. Or here's a new idea: increase the regular divided, or establish one, which will inspire long-term investor confidence and better support the stock.
Last week, Pitney Bowes announced such a buyback at the same time as it announced 1,500 layoffs. Am I the only one who sees the sadness of this parallel announcement? Am I too cynical in reading between the lines that “there is nothing worth investing in and we are laying off workers”? While the company appears to be taking some needed and decisive actions, why a stock buyback is in the middle of it is beyond reason. Perhaps Pitney Bowes should look at two recent stock buybacks that have not worked well.
Last year, Heidelberg announced a buyback, completing it this past September at an average price of 33.42 euros. Since then, the stock has fallen 40% from that average price and is now under 20 euros at the time of this writing (please note all stock charts in this note are live, and can be above or below these prices at the time of reading this note). Stock prices are always subject to fluctuation, but the stockholders would have at least had the certainty of their cash, and the freedom to buy more of the stock on their own if they choose. Despite the efforts to create a floor under the price with a buyback, the stock price still fell. If I was an HDD investor and loved the company's outlook, I'd have the ability to take the cash from my special dividend right now, and be buying the company on my own at a bargain price, at a time of my own choosing.
Xerox has also had a stock buyback program, and it can't be said that the stock has performed all that well, recently trading at $16 per share. Xerox' repurchases, based on data released in October, appear to be averaging $15.50 per share. The last $400 million of purchases, however, have been at $19.05 per share, losing $63 million in the process. The company, however, has re-established a quarterly dividend policy. Yet the buyback continues, with another $500 million still pending.
Rather than spending money on its own stock and in effect, “playing the market,” I think investors would prefer that Xerox (and other buyback companies) only invest in products and services that create value for its customers that its competitors can't. That's the kind of risk that investors really want; if they want to have the risk of buying stocks, they can lose $63 million on their own. Better if Xerox loses $63 million attempting to develop a new product, because even product failures add to technical and market knowledge that can be applied to future products and also adds to the experience of executives and improves their skills relative to competitors so that future failures are minimized. What would you rather say? “I lost $63 million developing a product but advancing the technology and our knowledge base (some people call that R&D)” or “I lost $63 million buying our own stock... whoops”? Rather than buying back more stock, Xerox should retire more debt or pay a bigger quarterly dividend.
Companies get really defensive about buyback decisions. Perhaps I will get e-mails again defending these decisions and claiming that I don't understand the entire situation and what great companies they work for. I suggest that they think about their true economic purpose and why they exist. They do things that are specialized that no others can. It seems quite plain to me. Anyone can buy stock. Not everyone can create technologies that change the world's communications. What Wall Street wants today is not always in the best interest of stockholders tomorrow.

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink.com's Economics and Research Center.

What do you think? Please send feedback to Dr. Joe by emailing him at drjoe@whattheythink.com.

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