These Companies Wasted Your Money

Corporate executives are lightning rods for criticism. But although eight-figure CEO salaries and ridiculously cushy perks get most of the attention from the media, other decisions made at the corporate boardroom level have a much larger impact on shareholder wealth -- and all too often, result in destroying that wealth.

How companies (ab)use your money
One of the biggest decisions that corporate leaders have to make is how to allocate their company's capital. Healthy businesses generate substantial amounts of cash flow, which then raises the question of how that money can best be used. If a company sees profitable opportunities to reinvest its profits back into its business, then the success or failure of its efforts is directly reflected in future financial results. Similarly, moves to pay down debt result in lower interest costs, which can raise earnings and improve results.

On the other hand, a company can return its excess cash to shareholders, either by paying a dividend or by buying back shares of company stock. With a dividend, shareholders make the ultimate decision about where the money goes. But with a buyback, corporate leaders are implicitly saying that their company's stock is a good investment at current prices -- and they're putting shareholder money where their mouths are.

Big, big buybacks
Recently, CNBC took a look at the biggest buybacks of the past decade. Although CNBC focused primarily on how the stocks performed during and immediately after the buybacks were completed, what struck me most about the programs was just how bad their timing sometimes was.

Here's a summary of some of the largest buyback programs:

Stock

Amount of Buyback

Time Buyback Program Occurred

Return Since Buyback Ended

Microsoft (Nasdaq: MSFT  )

$36.2 billion

July 2006 - Aug. 2008

16%

General Electric (NYSE: GE  )

$27 billion

Dec. 2004 - Dec. 2007

(43%)

Procter & Gamble (NYSE: PG  )

$20.1 billion

Jan. 2005 - July 2006

22%

Time Warner

$20 billion

Aug. 2005 - Aug. 2007

(17%)

ConocoPhillips

$15.1 billion

Jan. 2007 - Dec. 2008

13%

IBM (NYSE: IBM  )

$15 billion

Feb. 2008 - Dec. 2009

(1%)

Citigroup (NYSE: C  )

$15 billion

April 2005 - Aug. 2006

(90%)

AT&T

$13.5 billion

March 2006 - Dec. 2007

(27%)

Source: CNBC, Yahoo! Finance.

Granted, some of these buybacks turned out fairly well. In particular, IBM stands out as having implemented a buyback program just as the bear market was beginning. Similarly, P&G and Microsoft weathered the market meltdown better than others, and so they turned out to have made reasonable investments with their cash.

But more often, companies' capital allocation decisions proved to be disastrous. In particular, Citigroup had to go back to the capital markets to sell stock during the financial crisis at prices far below what it paid to buy back stock earlier in the decade. Most of the banks it competes with made similar mistakes. General Electric got expensive financing from Berkshire Hathaway (NYSE: BRK-A  ) (NYSE: BRK-B  ) with onerous terms, including a 10% dividend and multi-year warrants to buy additional shares. That almost certainly made GE regret having overpaid for share buybacks in previous years -- although Warren Buffett and his shareholders have to be happy about it, especially the way things have turned out.

The worst part of this debacle is that it was completely unnecessary. Simply by paying higher dividends, these companies could have disposed of their cash in a way that left the decision on whether to reinvest in additional shares of stock to each individual shareholder. Those who reinvested their dividends in stock that lost value wouldn't have been happy, but they couldn't have passed the blame for their bad fortune onto the executives of their company for a bad capital allocation decision on their behalf.

Pay attention
Like other traits that corporate executives must have, intelligent capital allocation is a skill. And like any skill, some people have more of it than others. If your leader is good at buying company stock low and selling it high, then buybacks make a ton of sense. But if the only thing stock buybacks are doing for a company whose shares you own is destroying shareholder wealth, then either demand change, or vote with your feet. Your financial survival may depend on it.

Don't waste your hard-earned investment dollars. Fool contributor Morgan Housel explains how banks are blowing up the entire economy.

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Fool contributor Dan Caplinger thinks money is a terrible thing to waste. He owns shares of Berkshire Hathaway and General Electric. Berkshire Hathaway and Microsoft are Motley Fool Inside Value choices. Berkshire Hathaway is a Motley Fool Stock Advisor selection. Procter & Gamble is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of Berkshire Hathaway and Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Fool's disclosure policy doesn't waste your time.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 14, 2010, at 10:37 AM, RationalOvi wrote:

    Good article, but should perhaps at least in passing make a reference to the significant advantage of buyback vs. dividends, namely taxation.

  • Report this Comment On April 14, 2010, at 11:14 AM, Railham wrote:

    Exactly! Buy backs rarely work as well as a nice fat dividend increase. They generally are a big waste of share holder dollars.

  • Report this Comment On April 14, 2010, at 7:12 PM, mountain8 wrote:

    Well companies sometimes need to pare down their 849 bazillion shares outstanding to something realistic. Nobody can time it right.

  • Report this Comment On April 18, 2010, at 11:05 AM, IRS706 wrote:

    The problem is that members of the board of directors (the board declares dividends or buy backs) have options. Buy backs can goose option values - dividends do not.

    Boards are to represent the stockholders (who don't get free options) yet options align their interests with that of the upper level employees who have options.

    Eliminate the tax advantage for options given to directors and instead give it to restricted stock for directors and make it so that such stock cannot be sold until 6 months after they leave the board. Dividends would rise and stupid actions driven by short term gains would drop.

  • Report this Comment On April 18, 2010, at 3:44 PM, yalewamb wrote:

    RationalOvi: Actually as per the Jobs Growth and Reconciliation Act of 2003, qualified dividends and capital gains are BOTH taxed at a rate of 15% (and for some - dividends are even taxed at 0% in recent years)! So currently, there is no tax advantage of repurchases. There is no incentive to pay dividends as mentioned by IRS706 as they would dilute the value of the executive's current holdings and unexercised stock options and unredeemed restricted stock whereas stock repurchases would increase them. Besides, any "losses" on a firm's own stock will never make it to the income statement - so who "cares" if they make a bad bet on their own stock. As the ultimate insider, I would expect treasury management could beat the market, and if not, there is some economically inefficient (for the company) explanation for the share repurchase.

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