Stock Buybacks: The Good, the Bad, the Ugly

Apple Buybacks Pay Most Ever as CEOs Spend $211 Billion on Their Own Shares
Excerpt:

Apple's $18 billion repurchase in the first quarter and the $16 billion it spent between April and June of 2013 are the two biggest buybacks by any company in data compiled by S&P starting in 1998. They came as the stock advanced as much as 77 percent over 15 months after falling to a 16-month low in April 2013. The return followed the weakest period for Apple shares in the last decade. After vaulting almost 900 percent from the end of 2005 through September 2012 and becoming the world's largest company by market value, Apple plunged 44 percent in seven months amid concern about new products and competition. Impeccable Timing "Their timing was impeccable," Todd Lowenstein, who helps manage $16 billion at Highmark Capital Management in Los Angeles, said in a July 31 phone interview. "They went in big, and it said to the market that they had confidence in their business plan and thought their stock was grossly undervalued. That's worked out well for them." Companies spending the most on their own stock are outperforming the S&P 500. The 100 firms with biggest buybacks relative to market value have gained 5.5 percent this year, compared with a 4.9 percent increase in the benchmark index, according to data compiled by Bloomberg.

Stock buybacks: Buy high and sell low Excerpt:

In 2006 and 2007 timber giant Weyerhaeuser ( WY ) conducted one of the biggest share buybacks in its history. It unleashed $800 million to purchase its shares, which were dancing near an all-time high of $80. In 2009, with the stock at $30, the company spent a mere $2 million on its own stock. Similarly, semiconductor equipment maker MEMC Electronic Materials ( WFR ) purchased $100 million of its shares near their peak of $90 in 2007. Today the shares are trading at $8, and MEMC shows no signs that it’s buying. Then there’s the ultimate horror story: Citigroup ( C ) spent $31 billion last decade on its own stock, only to see it crash 97%. Citi then needed $45 billion in infusions from the government. Call it the other bubble: From 2004 to 2008 companies flush with cash and confidence spent $1.8 trillion on their own soaring shares. When the market collapsed, what did they do? Rather than take advantage of discount share prices, as wise investors are supposed to do, they stopped buying. Indeed, the chart below illustrates just how closely share buybacks track the markets, when they should be doing the opposite.

How Does Buying Back Stock Affect Stockholders Equity? Excerpt:

When a company buys back stock from the public, it is returning a portion of its contributed capital to shareholders. Those shareholders are literally cashing in their equity. As a result, total stockholders' equity declines. It's important to note, however, that the remaining shareholders -- those who didn't sell their shares back to the company -- don't really "lose" anything when equity declines through buybacks. After a buyback, there is less equity in the company, but there are also fewer shareholders with a claim on that equity. In fact, by reducing the supply of company stock available in the market, buybacks tend to push share prices up, which leaves the remaining shareholders with stock that's more valuable than before. A stock buyback is solely a balance sheet transaction, meaning that it doesn't affect the company's revenue or profits. When a company buys back stock, it first reduces its cash account on the asset side of the balance sheet by the amount of the buyback. Say a company repurchases 100,000 shares for $50 each. The company would subtract $5 million from its cash balance. In the equity section, the company increases the "treasury stock" account by $5 million. Treasury stock represents money paid out to reacquire stock; it is a "contra equity" account that offsets contributed capital, so increasing treasury stock $5 million has the effect of reducing net contributed capital $5 million. The balance sheet is back in balance.

Comment: First article ... the success of Apple in buying back shares. Second article ... the less than successful buybacks by three companies. Finally the third article .. what it means to the company's balance sheet and to the stockholder. Image source from Ebay.