Investors generally consider stock buybacks an effective tool for enhancing shareholder value because they reduce outstanding shares, increasing the ownership percentage of existing stockholders. That's great in theory, but as Rich Smith points out in his Symantec
Intel
Here's the repurchase breakdown: 234 million shares repurchased for the benefit of stockholders and 237 million shares handed over to employees for a $10.41 loss per share -- a total transfer of $2.5 billion in shareholder wealth to employees. Whatever euphemistic spin management uses to describe this redistribution, it's still a lot of money. Not to mention other issues the company is dealing with related to stock options.
I call attention to Intel only as an example, and don't think for a moment it's the only company that does this. For instance, in 2003 alone, Cisco
Investors shouldn't be deluded by claims of enhancing shareholder value through stock buybacks. The use of shareholder funds to stem stock option dilution is a real cost, one that can't be found in earnings, operating cash flow, or even free cash flow. So the next time one of your companies proclaims its love of shareholders by announcing a buyback, be skeptical, because if deceptively shifting money from owners to employees enhances shareholder value, you have to wonder what destroying it looks like.
Fool contributor Chris Mallon gets burned up when he sees management waste shareholder dollars. He owns shares of Harley-Davidson through his private investment partnership.