When Buybacks Go Bad

Watch stocks you care about

The single, easiest way to keep track of all the stocks that matter...

Your own personalized stock watchlist!

It's a 100% FREE Motley Fool service...

Click Here Now

Stock buybacks are a double-edged sword. By reducing share counts, they can boost the value of each remaining share. But if management buys back shares at too high a price, it's effectively destroying value. Worse yet, spending money on buybacks and dividends can also rob companies of other opportunities.

Corporate choices
A company can do any number of things with the money it earns: Pay down debt, buy another company, build another factory, hire more workers, buy more advertising, pay out a dividend, buy back shares, or just let the money pile up. Great companies use their dollars wisely.

If a company pays a dividend or buys back shares at a fair price, shareholders will profit. But neither of those steps will make the company bigger, stronger, or better positioned. Devoting that money toward building the business instead might ultimately benefit shareholders even more. That's why Warren Buffett has resisted paying a dividend for so long. Letting cash pile up has permitted him to make the occasional huge purchases for which he's famous.

Coffers and offers
Cisco Systems
(Nasdaq: CSCO  ) spent nearly $8 billion buying back shares in fiscal 2010, and has spent $65 billion over the past decade. It recently announced plans to initiate a dividend, which will cost it between $1 billion and $3 billion annually. The company recently had about $40 billion in cash and short-term investments, so these sums won't cripple it. But it might be able to use those big sums to do big things.

Some investors have suggested that Cisco might buy Research In Motion (Nasdaq: RIMM  ) , recently valued around $27 billion, to bolster its presence in the wireless phone arena. Research In Motion's smartphones appeal primarily to business users, meshing well with Cisco's strong focus on corporate customers.

Similarly, Oracle (Nasdaq: ORCL  ) spent about $10 billion on share repurchases during its 2007 to 2009 fiscal years. There's talk that it might buy EMC (NYSE: EMC  ) to strengthen its storage capacity and virtualization software chops. But since Oracle recently had only about $24 billion in cash, compared to EMC's market cap of $44 billion, Oracle might have to issue more stock to fund such a purchase.

The big picture
These and other companies' buyback and dividend moves aren't necessarily dumb. In the current economic environment, big and healthy companies can borrow large sums of money for very little, giving them greater flexibility. But few companies will qualify for the best deals. And in any economy, it's useful to think about exactly how a company is spending its cash, and whether it's losing out on any more attractive opportunities in the process.

Some dividends are not just suboptimal -- they're downright crazy!

To learn about attractive dividends, click here to get The Motley Fool's free report: "13 High-Yielding Stocks to Buy Today."

Longtime Fool contributor Selena Maranjian doesn't own shares of the companies mentioned. The Fool has a bull call spread position on Cisco Systems. The Fool owns shares of Oracle. Try any of our investing newsletter services free for 30 days. The Motley Fool is Fools writing for Fools.

Read/Post Comments (0) | Recommend This Article (2)

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.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1343719, ~/Articles/ArticleHandler.aspx, 10/21/2016 8:21:01 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated Moments ago Sponsored by:
DOW 18,145.71 -16.64 -0.09%
S&P 500 2,141.16 -0.18 -0.01%
NASD 5,257.40 15.57 0.30%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

10/21/2016 4:00 PM
BBRY $7.37 Down -0.11 -1.47%
BlackBerry CAPS Rating: *
CSCO $30.15 Down -0.01 -0.03%
Cisco Systems CAPS Rating: ****
EMC $0.00 Down +0.00 +0.00%
EMC CAPS Rating: ****
ORCL $37.93 Down -0.16 -0.42%
Oracle CAPS Rating: ****