Aggressive Stock Buybacks Punishing Shareholders
Share buybacks are often positioned as positive news by companies. Press releases for stock buybacks seem to have a mandatory CEO quote to the effect of “we don’t see a better investment in the market than our own company“. And while there can be sound reasons for stock repurchases, they are often done purely to provide a short-term increase in stock price, often benefiting insiders who then exercise options or sell their shares.
That’s the premise of the latest Chairman’s Corner position piece by Audit Integrity chairman James Kaplan. He argues that share buybacks are a naive and self-serving bet that good times will last forever. Instead, according to Kaplan, recent events suggest that the moneys spent on share repurchases could have been better used to shore up the capital requirements of the company. He cites two recent examples of companies with extensive buybacks, which are now experiencing financial struggles :
- Citigroup, forced to borrow $7.5 billion from ADIA at high yields; and
- Freddie Mac, compelled to issues preferred shares at a historic premium for a quasi-governmental agency
According to Kaplan:
Buybacks will turn out to be one of the worst management decisions made in recent history.
The Audit Integrity report lists 36 financial companies which repurchased shares in their companies and which they deem very likely to require additional capital to survive. The list includes large cap stocks like Genworth Financial, Hartford Financial Services and Merrill Lynch; small and mid-cap companies like Centerline Holding, Farmers Capital Bank Corp and Sierra Bancorp; and non-US companies including Credit Suisse, Deutsche Bank and ING.
According to the report, the impact of these actions will be severe and long lasting:
The primary beneficiaries will be Petrodollar countries, as they acquire distressed properties, and plaintiffs’ attorneys, who will demand the repatriation of funds stolen from them.
The report, entitled Who Are They Kidding, which includes the full list of 36 companies, is available for free download.
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