Cramer and FT: Buybacks Offer No Real Shareholder Value
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You can have a stock buyback program in one hand and $1.25 in the other, and still only end up with a cup of coffee at the end of the day. At least, that's what stock-picking savant Jim Cramer and the Financial Times are bellowing.
According to Cramer, stock buyback programs are generally viewed as positive by the investing community as companies aim to return value to shareholders the old-fashioned way: reducing share count. Cramer argues, however, corporations would do better to issue beefier dividends for investors rather than cut share count.
For one, Cramer contends reduced stock doesn't protect a company from losing value if markets plummet. An example: the banks in 2008, when buybacks were common, but stocks still dropped and shareholders lost money. Cramer believes the biggest offenders are companies like Aetna (NYSE: AET) and UnitedHealth Group (NYSE: UNH), among other HMOs. He said HMOs kept dividends small and bought back shares, which did nothing to lift share prices. Cramer said the billions spent on buybacks would have been better off in dividend form.
Cramer boldly said buybacks were not a reason to own a stock, and may actually be a catalyst to sell, claiming buybacks are a "false sign of health... and often a waste of shareholders' money."
The Financial Times also put out a column over the weekend addressing stock buybacks, saying the moves are often doomed to destroy shareholder value. Though FT notes buybacks have increased as prices have ebbed, this isn't the normal behavior for companies either in the U.S. or U.K.
Actual returns on the buybacks "would have been laughed out of the boardroom" had they been proposed for a bricks-and-mortar project or other conventional venture, the FT argues.
But institutional investors, which care little for the long-term heath of the company, would welcome the change to sell shares for a premium when the stock is slumping. Additionally, investment banks also garner fees from promoting buybacks to clients and investors, something that does not happen with dividends.
Earnings also increase as the number of shares are reduced, making CEOs whose compensation is still tied to earnings results happier and richer in the process. The increased EPS does nothing to improve the profitability of a company, FT notes.
Long-term holders of a company end up with the short-end of the stick on buybacks, unless purchases are made below the intrinsic value of the company. Money used on buybacks generally suggests the company could find no better way to invest and build for the future (though this may not always be the case). Further, buybacks do nothing to enhance the economic environment where a company does business as it might do through expansion and job creation.
The FT also believes that although buybacks in the U.S. have increased, shares being bought by managers haven't made purchases at the same rate as in the past.
Whether buybacks are good or bad may have a lot to do with timing and purpose as well. To keep up on the latest buybacks, click here. To track what management is buying, click here.
According to Cramer, stock buyback programs are generally viewed as positive by the investing community as companies aim to return value to shareholders the old-fashioned way: reducing share count. Cramer argues, however, corporations would do better to issue beefier dividends for investors rather than cut share count.
For one, Cramer contends reduced stock doesn't protect a company from losing value if markets plummet. An example: the banks in 2008, when buybacks were common, but stocks still dropped and shareholders lost money. Cramer believes the biggest offenders are companies like Aetna (NYSE: AET) and UnitedHealth Group (NYSE: UNH), among other HMOs. He said HMOs kept dividends small and bought back shares, which did nothing to lift share prices. Cramer said the billions spent on buybacks would have been better off in dividend form.
Cramer boldly said buybacks were not a reason to own a stock, and may actually be a catalyst to sell, claiming buybacks are a "false sign of health... and often a waste of shareholders' money."
The Financial Times also put out a column over the weekend addressing stock buybacks, saying the moves are often doomed to destroy shareholder value. Though FT notes buybacks have increased as prices have ebbed, this isn't the normal behavior for companies either in the U.S. or U.K.
Actual returns on the buybacks "would have been laughed out of the boardroom" had they been proposed for a bricks-and-mortar project or other conventional venture, the FT argues.
But institutional investors, which care little for the long-term heath of the company, would welcome the change to sell shares for a premium when the stock is slumping. Additionally, investment banks also garner fees from promoting buybacks to clients and investors, something that does not happen with dividends.
Earnings also increase as the number of shares are reduced, making CEOs whose compensation is still tied to earnings results happier and richer in the process. The increased EPS does nothing to improve the profitability of a company, FT notes.
Long-term holders of a company end up with the short-end of the stick on buybacks, unless purchases are made below the intrinsic value of the company. Money used on buybacks generally suggests the company could find no better way to invest and build for the future (though this may not always be the case). Further, buybacks do nothing to enhance the economic environment where a company does business as it might do through expansion and job creation.
The FT also believes that although buybacks in the U.S. have increased, shares being bought by managers haven't made purchases at the same rate as in the past.
Whether buybacks are good or bad may have a lot to do with timing and purpose as well. To keep up on the latest buybacks, click here. To track what management is buying, click here.
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