HASTINGS GREED WILL LAND HIM IN JAIL NEXT Buybacks: The Bad I get nervous when companies buy back stock at the same time insiders are selling and the stock price is rising. One such example is Netflix (Nasdaq: NFLX). In the past year (July 2009 to July 2010), insiders have sold $132 million of stock and made no purchases. Furthermore, the company is increasing the amount it is willing to spend on buybacks.
In 2009, Netflix bought back a record $324 million in stock. It even took on debt to finance these higher-priced repurchases. While Netflix's business and stock have performed exceptionally well over the past few years, it appears management might be being a bit reckless with its recent share repurchases.
Buybacks: The Ugly The most egregious buyback situations usually show up in the related-party transactions, as listed in the annual report. Here's a past example from Fidelity National (NYSE: FNF):
In August 2007, FNF's chairman of the board, William P. Foley II, planned to sell 1,000,000 shares of FNF stock on the open market. Because the company was actively purchasing shares of treasury stock on the open market at the same time, the company agreed to purchase 1 million shares from Foley on Aug. 8, 2007, for $22.1 million, or $22.09 per share, the market price at the time of the purchase.
Fidelity National currently sits at just under $15 per share. I don't know about you, but I don't want an insider sitting on both sides of that decision. Is he serving his fiduciary obligation to shareholders or serving his best interests? It seems like an inherent built-in conflict to me. As it turns out, it seems like Mr. Foley the individual got the best of Mr. Foley the CEO on this one.
While buybacks are always pitched to investors as a wonderful opportunity to "return capital to shareholders," it's not always the case. They are only wonderful if the company has excess capital and is repurchasing shares at a discount to their intrinsic value.