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Thursday, November 8, 2007

Share Buybacks - Do they really help?


In his Weekly Investing Roundup - November 2, 2007, The Dividend Guy wrote:

Even though I love dividend investing, there seems to be a real trend out there as companies turn to buying back shares instead of issuing dividends. I think there is a belief that buybacks bring more value to shareholders in the form of reduced float and higher share price. I am not convinced this is in investor’s best interests. Here is the article from S&P (pdf).

The Dividend Guy is certainly on point here. I have long thought that relying primarily on share repurchases for a company to return wealth to it shareholders was short-sighted. Earlier this week, I read an interesting article in Financial Week titled Buybacks don't always move stocks, S&P funds. It highlighted that share repurchases are not the panacea that is portrayed in the popular media. Below are some relevant excerpts:

Standard & Poor’s Equity Research examined 423 companies in the S&P 500 that reported share repurchases over the past 18 months. Only one out of every four, or 103 companies, outperformed the index after reporting the buyback, the study found.

“While these initiatives may create a positive aura around a company’s shares, our study showed an inverse link between repurchase activity and the returns achieved,” said the study’s authors, Stewart Glickman and Todd Rosenbluth of Standard & Poor’s Equity Research. “The companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period,” they said.

“We believe that share buybacks may sometimes be a subtle admission by management that reinvesting in their core operations does not represent a good opportunity,” said Stephen Biggar, global director of equity research for S&P, in a statement.

Companies like share repurchases because there is no long-term commitment and no expectation of consistency - attributes that are expected by investors in a good dividend companies.

What are your thoughts on share buybacks vs dividends?

Full Disclosure: No position in the aforementioned securities. See a list of all my income holdings here.

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(Photo: Steve Woods)

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