You probably heard the noise around The New York Times op-ed from Senators Chuck Schumer and Bernie Sanders blasting stock buybacks and promising to introduce legislation that would “...prohibit a corporation from buying back its own stock unless it invests in workers and communities first…”
The general consensus regarding the senators’ proposal is that while, yes, stock buybacks have sometimes been misguided, it’s bad policy to mandate limitations because that would be—get ready for the word of the upcoming presidential election—socialist. (It’s also been noted that while the op-ed is consistent with Bernie Sanders’s positions, it’s a departure for New York’s Senator Schumer, usually a friend of Wall Street, who may be looking to play up his leftist bonafides in the current political environment.)
I’m not going to weigh in on whether I think limiting stock buybacks is a left wing plot, except to say that anytime there are calls for government action to protect the general public—seat belts, food safety, voting rights—the outraged and knee-jerk call from certain political quarters is to brand it socialist.
I would like to point out, however, that many stock buybacks of high-profile companies have been spectacular failures all around.
“The record of most buybacks is not favorable. Typically you see after a buyback, the stock price will fall,” says Charles Elson, finance professor and director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “There’s a bias to management in favor of buybacks because it increases the value of their options…”
Yahoo Finance’s Brian Sozzi writes about how Apple’s buyback program has been heretofore at the very least, ill-timed.
But there are some other even more egregious examples.
Here then is the Stock Buyback Hall of Shame.
The erstwhile entertainment giant squandered its future by buying back stock and not investing in the business. Its Paramount movie studio is a shadow of its former self and its TV networks like MTV and Nickelodeon are rickety.
According to Reuters: “Between October 2012 and March 2015, Viacom spent about $9.7 billion on buybacks, at an average cost of $73.58 per share, based on company filings - or about 55 percent more than the current stock price [on February 10, 2016].”
Over the past five years Viacom’s stock (VIA) has dropped over 65% (even taking into account a nice pop last month), versus a gain of 40% for rival Disney and 47% for the S&P 500. The stock currently trades for $29. At some point Viacom may make value investors rich, but they’ve been saying that for years.
The woes of this once icon of American management know-how are now legend. A major facet are the company’s sorry buyback programs.
In a nutshell GE (GE) bought back over $40 billion of its stock over the past decade (some 15% of its market cap) at prices between $10 and $30. (At least half of the buying was done in the upper half of that range.) Today the stock trades for $9.
“Throughout the past decade, there is a high correlation between how expensive GE’s stock is versus current cash flows and how much stock the company repurchases,” write David Trainer and Sam McBride in New Constructs. ”By inefficiently utilizing valuable capital to buy back stock at inflated prices, the company destroyed value for long-term shareholders.”
The auto behemoth famously needed billions in government bailout funds during its bankruptcy filing in 2009. But not long before that it had billions in cash flow. Guess where much of the money went? Between 1986 and 2002 GM (GM) spent over $20 billion on stock buybacks.
Bloomberg notes that if GM had simply banked that $20 billion instead, “it would have had $35 billion in 2009 to stave off bankruptcy and respond to global competition.” GM stock prices back then? Shares peaked in April of 2000 at $93. It traded at $40 in 2007. Two years later the stock was delisted, essentially worthless.
Eddie Lampert tried just about every known form of financial alchemy to save the World’s Largest Store, and of course buybacks were included. Sears (SHLD) spent billions buying back its stock, at you guessed it, just the wrong time.
As Chris Isidore of CNN asked: “Would $6 billion in cash have kept Sears out of bankruptcy? It sure wouldn't have hurt.” Sears put the program in place in 2005. In 2007 the stock was over $120, but then basically went to zero last year when the company filed for bankruptcy.
Big Blue has spent some $80 billion in stock buybacks over the past decade. Since 2014, the stock is down 27%, while the S&P 500 is up 47%. Legendary investor Stan Druckenmiller spelled out the problem at CNBC’s Delivering Alpha Conference in 2014:
“I would say IBM (IBM) is the poster child. They literally faced a threat not too dissimilar to what Kodak and Xerox [confronted], in terms of a new technology staring them right in the face. Instead of increasing investment to combat the threat, they've actually borrowed a lot of money to buy back stock."
For investors the takeaway is to be wary of big buyback programs. “...the initial response generally positive, get a little bump in price. Then people start thinking more about what’s going on here, how a firm is performing on an economic basis rather than managed number basis,” says Paul Griffin, a professor at the University of California, Davis Graduate School of Management.
Question to leave you with: If you think Chuck Schumer and Bernie Sanders are bad guys or socialists for proposing laws that would curb these kinds of buybacks, what do you call the executives who implemented the programs?
Andy Serwer is editor-in-chief of Yahoo Finance. Follow him on Twitter @serwer.