Stop the Buyback Insanity!

I love Netflix (Nasdaq: NFLX  ) for its service, for its excellent stock returns, and for CEO Reed Hastings' inspired leadership. But I don't love its share buyback program.

The online video-rental expert just authorized another $300 million of share buybacks. The last $300 million authorization came in August 2009, only seven months after a $150 million buyback notice. After starting its buyback actions in 2007, Netflix has now spent more than $732 million buying back its own shares. And I hate the very idea.

Typically, share buybacks are widely used, shareholder-friendly exercises of dilution control and share-price support. For example, Microsoft (Nasdaq: MSFT  ) spent $9.4 billion on buybacks last year, while only issuing $579 million in new stock, returning good value to shareholders. Very nice, no problem; kudos all around.

For Netflix, however, the situation is very different. Imagine, if you will, if Apple (Nasdaq: AAPL  ) started buying back shares today. Unlike Microsoft, but very much like Netflix, Apple is riding at nearly record-level prices. "Buy high" is rarely an optimal use of cash. Apple prints more stock certificates than it retires, and I think Netflix should do the same.

And that's not even all; Netflix has even less reason for buybacks than Apple does. You see, Apple has so much cash on hand that Steve Jobs can't figure out what to do with it all. Jobs could be forgiven for overspending on buyback programs, because his company can afford the strategy.

For Netflix, every dollar spent on buybacks could have been spent on buying the digital streaming rights to more movies. That's not just conjecture, either: Hastings has already taken extraordinary measures to shovel more cash into those vital content licenses. Diverting today's $300 million buyback provision into the pockets of Sony (NYSE: SNE  ) and Walt Disney (NYSE: DIS  ) would bolster the streaming movie library by a significant degree. It's what Netflix does, and also what it should be doing.

Share buybacks are great in theory, Reed. They're even awesome in practice for most firms. In your case, however, I would love to see them stop. You don't take your foot off the accelerator at the start of the race.

Would you prefer buybacks or more content licenses? The comment box below is wide open for your input.

Fool contributor Anders Bylund owns shares in Netflix and Disney, but he holds no other position in any of the companies discussed here. Walt Disney and Microsoft are Motley Fool Inside Value selections. Apple, Walt Disney, and Netflix are Motley Fool Stock Advisor picks. Motley Fool Options has recommended a diagonal call position on Microsoft. Try any of our Foolish newsletters today, free for 30 days. You can check out Anders' holdings and a concise bio if you like, and The Motley Fool is investors writing for investors.


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