One piece of sage advice sums up the ultimate goal of investing: Buy low and sell high. Yet after a brief hiatus, many companies are ignoring that wisdom, and buying back their shares only after a big run-up in the stock market.
Who's buying
Standard & Poor's reported earlier this week that stock buybacks among S&P 500 companies jumped to $34.8 billion during the third quarter. That's 44% higher than the second-quarter total of $24.2 billion, which was the lowest figure since S&P started tracking buybacks back in 1998.
In particular, two sectors saw big increases in the amount of money spent buying back stock. Technology-stock buybacks more than doubled their pace of three months ago, with Hewlett-Packard
Also, buyback activity within consumer-driven industries rose sharply. Consumer-staples businesses like Philip Morris International
Fool me twice
The big question, of course, is where these companies were during the first two quarters of the year. Although most of the same stocks show up on the buyback lists from earlier this year, some have made the apparently dumb move of dramatically ramping up their buyback activity even as their prices have gone up. Consider the following:
|
Company |
Money Spent on Buybacks 2009 Q1 |
Money Spent on Buybacks 2009 Q3 |
Change in Stock Price From Mar. 31 to Sept. 30 |
|---|---|---|---|
|
Hewlett-Packard |
$801 million |
$2.102 billion |
47.8% |
|
Cisco Systems |
$1.204 billion |
$1.869 billion |
40.4% |
|
DirecTV |
$346 million |
$943 million |
21.0% |
Source: Standard & Poor's, Yahoo! Finance.
Moreover, Intel and CVS Caremark didn't even make the cut for the top buyback lists during the first quarter, yet their shares also rose substantially between March and September.
Not all of these companies are being dumb about their buybacks. AutoZone has maintained its pace of buybacks despite a drop in prices. Philip Morris International, meanwhile, has kept its buybacks relatively stable across quarters, suggesting almost a dollar-cost averaging approach. But looking forward, a number of companies have renewed or increased buyback authorizations, pointing to continuing growth ahead.
Seeing the bigger picture
If you focus just on the past year or so, it seems like the mistake companies are making lies in buying back too much of their stock right now. Yet there's another angle to this phenomenon that only makes companies look dumber.
Even though buybacks are up from their historic lows earlier this year, they're still down 80% from their record-high levels from two years ago. During the third quarter of 2007, companies spent a whopping $172 billion buying back their own shares. That quarter turned out to be the high point for the market, as subprime lending started to expand outward throughout the financial system. Even after the market's rally, the broad U.S. stock market still fell more than 30% between September 2007 and September 2009.
So from this other point of view, you have to ask why companies aren't spending more on buybacks. After all, if their shares were such a good buy at the lofty prices they fetched two years ago, they must be an absolute steal right now.
Follow your own path
The most unfortunate thing about stock buybacks? Many investors look at them as a unequivocally positive sign for their own shares. All other things being equal, it makes sense that the added demand for shares that a buyback program provides should help support stock prices. But given some companies' horrible track record in timing their buybacks, you have to wonder whether it wouldn't be better to use them as a contrary indicator and a cue to sell out.
It's encouraging for the economy in general that companies feel comfortable returning cash to shareholders by buying back their stock. I just wish that companies would try a little harder not to look so much like the trend-following herd.
