Dow Jones Industrials Play The Share Buyback Game

By Will Ashworth | March 10, 2010 AAA

USA Today ran an interesting article in late January about stock buybacks. It highlighted some of the reasons why share repurchases are less popular these days, suggesting the lion's share of the $820 billion in cash sitting on the balance sheets of public companies in the U.S. might not go to buybacks as in years past. If the second quarter in 2009 is any indication, with $24.2 billion in share repurchases - the lowest in more than a decade - the prediction very well could be right. In 2007, S&P 500 companies spent $589 billion repurchasing stock, $2 billion more than their combined earnings. I'll look at five of the largest buybacks that year and whether shareholders got their money's worth.

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Exxon Mobil (NYSE: XOM)

In 2007, the oil company bought back $31.8 billion of its stock at an average price of $82.38 a share. Its shares traded at a low of $69.02 and a high of $95.27 during the year for an average of $82.15. Based on its trading range in 2007, Exxon Mobil did an average job repurchasing its shares. Today, those 386 million shares would be worth $25.7 billion, $5.1 billion less than two years ago. If it bought those shares at 2007 lows, it could now pay investors a special dividend in 2010 of $1.08 a share. If it refrained from buying back its stock entirely, the special dividend would be as high as $6.23 a share, almost a 10% yield based on current prices. This is especially important given the fact the tax rate on dividends could be going up in 2011.

Large Share Repurchases In 2007

Company Amount High Low Avg. Amount Paid Current Share Price
Exxon Mobil (NYSE:XOM) $31.8B $95.27 $69.02 $82.15 $82.38 $66.48
IBM (NYSE:IBM) $18.8B $121.45 $88.77 $105.11 $105.29 $126.41
General Electric (NYSE:GE) $13.9B $42.15 $33.90 $38.03 $38.84 $16.27
AT&T (NYSE:T) $10.4B $42.97 $33.20 $38.09 $38.91 $25.28
Pfizer (NYSE:PFE) $10.0B $27.73 $22.24 $24.99 $25.27 $17.35

Mediocre Returns

As we can see by the table, all five companies cut a terrible deal for shareholders. With results that are average at best, this cash could have gone to paying larger dividends or making acquisitions and improving existing facilities. In my opinion, none of these companies knows the intrinsic value of their shares; otherwise, they'd have hung on to the cash. Apple (Nasdaq: AAPL) takes a lot of heat in the investment press for not using its $40 billion cash stash toward dividends or stock buybacks, preferring to keep it for potential acquisitions and R&D. Its stock sits above $200, and yet some investors clamor for the company to do buybacks. Obviously, Steve Jobs understands that share repurchases are a losing proposition for most companies. As Warren Buffett often remarks, it's not easy building a $10 billion position. You'd think some of the largest companies in the world would understand this.

How The Rest Did

Only IBM has a stock price that's higher today than when it repurchased its shares back in 2007. These five companies spent $85 billion on stock that is now worth $67.8 billion, wasting $17.2 billion in cash. I'd think twice about any of these investments except perhaps IBM. At a time when so many Americans are struggling to keep their heads above water, it seems shameful that companies are so cavalier with shareholder funds.

Bottom Line

Public companies need to learn that if they are going to play the share repurchase game, they must play to win. To do so, it's important that they have a good idea of the intrinsic value of their stock and never overpay. It's easy to understand but hard to follow. Even McDonald's (NYSE: MCD), which has benefited handsomely in the past five years from large share repurchases, has work to do. In 2007, it bought 77.1 million shares for an average purchase price of $51.22 a share. Its shares traded at an average price of $53 with a low of $42.31. While it did manage to repurchase its shares at less than the average, I'm sure management knows it can do better. However, its stock price is up 27.1% since then. That's the ultimate victory. (For related information, take a look at A Breakdown Of Stock Buybacks.)

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