With the end of the first quarter of 2016 now clearly in sight, it’s also time to start looking ahead to this year’s first earnings season.

While all analyst and investor eyes will be looking for both top and bottom line growth from their favorite (and sometimes surprising) stock picks, others will focus on another number that continues to climb regardless of market conditions: stock buybacks.
Magnifying glass in hand and text - business background
While some investors may not realize just how prevalent the practice of “stock buyback” plans and programs are, others are trying to bring the issue into broad daylight for all to see.

One of those, Gretchen Morgenson of the New York Times, went as far as to call share buybacks “the buyback mirage.”

Indeed, Robert Colby, a retired investment professional now engaged in running an equity evaluation service for institutional investors, says recent research of 26 companies buying back stock “confirms my suspicion that while buybacks are not universally bad, they are practiced far more broadly and without as much analysis as there should be.”

Investors looking at their portfolios would be wise to find out how many individual stocks are engaged in share buyback programs, the total projected cash outlay expected, and the value of the program in terms of actual profit between the purchase prices paid and current share prices.

Not surprisingly, many may be very unhappy with what they find both in terms of return, and in how many stocks in any one sector might be infecting their portfolios.

Investors loaded up with tech stocks will likely feel the most pain. According to FactSet, that’s the sector that spent the most money in the fourth quarter of 2015, shelling out over $33 billion to buy back stock.

Indeed, three of the top ten stock buyback stocks reside in the tech industry:

top 10 msi 4.13.16

What may be worse, however, is not only do some of these buyback provide no return, but they may also be money spent yet not even earned.

Indeed, companies buying back stock at prices that are way too rich is nothing new. Gary Gordon, President of Pacific Park Financial, points out that 130 of the S&P 500 companies have buyback-to-net-income ratios above 100%, meaning they are spending more in buybacks than they’ve made in net income.

But the most pernicious effect of the ‘buyback mirage” for investors is certainly the sheer amount of value lost when those buybacks, aimed at “enhancing shareholder value”, turn out to do just the opposite when share prices fall.
Check your portfolio for these egregious buyback losers on paper according to MoneyWatch:

  • IBM (NYSE:IBM): ($7.9 billion)
  • Qualcomm (NASDAQ:QCOM): ($7.4 billion)
  • American Express (NYSE:AXP): ($4.1 billion)
  • Exxon Mobil (NYSE:XOM): ($3.9 billion)
  • Hess Oil (NYSE:HES): ($2.9 billion)
  • Chevron (NYSE:CVX): ($2.8 billion)

loserWhat may be worse than investors being saddled with these ticking time bombs of loss is that companies are spending monies that should be put to better use in capital expenditures, and perhaps research and development.

If these companies (and the many others engaged in buybacks that make no real sense other than to reduce shares outstanding in an effort to hide meager earnings growth) can’t find meaningful projects to fund, here’s another idea on how to spend the money: increase dividends!

Apple, Microsoft, and Oracle are sitting on mountains of cash. Any increases from existing levels would be greatly appreciated!

So while you await those first quarter earnings reports, take a few minutes to dig into financial statements and find out exactly how much, and for how much longer your investments will maintain existing buyback programs.

Decide for yourself if the program is, indeed, a mirage.

(Marc Bastow is long AAPL, MSFT and XOM)

Share This