By James Saft
Feb 5 Based on its own history, and the broader
experience with other companies, Apple's plan to buy back $60
billon of its own shares will probably end as a bit of a
That's because companies on the whole buy their own shares
badly, a generalization which Apple seems well on its
way to fulfilling.
Under intense pressure from activist investor Carl Icahn to
up that $60 billion by another $50 billion, Apple last week beat
earnings and revenue estimates but managed to disappoint the
market anyway, sparking a double-digit percent sell-off in its
Apple's buybacks during the quarter were central to the
story in two ways: first, they flattered earnings in a way only
a sycophant would believe; second, they lost money anyway.
That second point should come as no surprise to students of
corporate history, or for readers of a newly revised study by
academics at the University of Kentucky which shows that, on the
whole, executives do a worse job timing share buybacks than if
they simply left the task to a robot.
First, let's talk about Apple in specific. While it beat
estimates on earnings per share it did so only because $5
billion in buybacks during the quarter reduced the number of
shares across which earnings must be shared. Good news you might
say, but not good enough by a long shot to overcome concerns
about sales in key products or about Apple's ongoing ability to
create new needs among its consumers.
The net result was that Apple spent $5 billion in the
quarter buying shares for an average of $523.50 per share,
shares now worth just $512.59 each. Apple's P/E net of its $150
billion or so of cash is about 8, which the market evidently
deems correct for a company struggling to grow its net income.
In contrast, Apple paid dividends of $2.7 billion in cash
during the quarter, money which investors were free to re-invest
or invest elsewhere as they saw fit.
According to the study, by Alice Bonaime, Kristine Watson
Hankins and Bradford Jordan of the University of Kentucky,
despite having presumably good information about the health and
valuation of their own companies, executives carrying out share
repurchase programs leave quite a bit on the table. ()
Unusually, the study compared the annualized rate of return
of repurchased stock compared to what the company would have
made had it simply made regular, identically sized repurchases.
Looking at 5,500 firms which bought back stock between 1984
and 2010, they found that while companies made an average
annualized return of 7.66 percent, they could have bumped that
up to 9.64 percent had they only closed their eyes and bought
the same amount every quarter.
"Managers, on average, repurchase when prices are higher and
would be better served by simply smoothing their repurchasing
dollars more evenly across time," the authors write.
To understand why the people with such good information
perform so poorly, you really have to consider that maximizing
shareholders returns is not always at the heart of buyback
But why do managers time things badly? One possible reason
is to flatter earnings and allow managers to reach otherwise
unattainable expectations. The study identified firms within the
sample with an incentive to use buybacks to manage earnings and
found something striking. Those with reason to monkey with the
share denominator in order to meet expectations which they
otherwise wouldn't underperformed in their timing of share buys.
The easy conclusion to draw is that managers seeking to
flatter earnings are less concerned about whether they are
getting a good price on their own shares with shareholder
Similar results were found with companies facing dilution
because of the issuing of new shares. Given that executive
compensation is a common reason for dilution we have evidence
here of agendas which are not exactly serving well the widows,
orphans and pension funds which own companies.
Interestingly, the study also found that smaller companies
during merger waves often repurchase their own shares at
sub-optimal prices as a means of staving off a takeover. Now, I
have my doubts about the value of many takeovers, but I am
guessing that the executives are giving at least some thought to
the reality that they would be out of a job if their company
To be clear, I have no idea about the motivation of Apple
executives. Carl Icahn, a smart guy if ever there was one,
thinks buybacks are a good idea, and it is certainly true that
Apple's cash pile needs addressing in some way.
On the whole, however, I think I'd prefer dividends.