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JPMorgan Chase (NYSE: JPM ) repurchased billions of dollars of its own stock in the middle of last year. That didn't turn out so wise, as shares fell more than 25% later in the year. The company had largely exhausted its authorized share repurchase program after shares bottomed, and couldn't take advantage of its bargain stock price.
CEO Jamie Dimon admitted fault. "Yes, it would have been wise to wait," he said in a conference call last fall. "We're sorry."
It doesn't look like it. JPMorgan authorized a new $15 billion buyback program in March after shares surged more than 50% from their November lows. Now that it's losing billions of dollars on a backfiring derivatives bet and its stock has dropped by a third, it's suspending those plans. Buy high, shrug shoulders low. Next!
In a way, this isn't Dimon's fault. The bank has to adhere to new regulatory capital requirements and gain permission from regulators to repurchase stock and issue dividends -- both consequences of the 2008 financial crisis.
But it's still inexcusable. For one, this isn't an isolated incident. From 2000 through the financial crisis, JPMorgan (with leaders other than Dimon) pulled off an almost flawlessly bad record of repurchasing stock when its shares were high, and suspending buybacks when they became cheap:
Source: S&P Capital IQ.
And while banks have to gain permission to engage in share repurchases, no one forces them to hit the "buy" button. When analyzing the economy, John Maynard Keynes said, "The boom, not the slump, is the right time for austerity." That logic should apply to companies repurchasing their own stock -- save money for a rainy day, and spend it when it starts raining. But very few companies actually do that in practice. Instead, it's a circus of buying high, panicking low, and squandering shareholder money.
Buybacks among S&P 500 companies peaked at more than half a trillion dollars in 2007. Then, as shares came crashing down in 2009, they plunged to $185 billion. Now that shares have rebounded sharply, so have buybacks. It's exactly the opposite of what you want to see.
Some examples are just pitiful. Between 1999 and 2008, Citigroup (NYSE: C ) repurchased $41 billion of its own stock -- almost exactly equal to the $45 billion in taxpayer money it needed under the TARP bailout program. Bank of America (NYSE: BAC ) bought back $60.3 billion of its shares during that time -- more than it eventually took in bailout funds. Netflix (Nasdaq: NFLX ) repurchased $200 million of its stock in the first three quarters of last year at an average price of $221 per share, and then just months later sold $200 million worth of shares at prices 70% lower. You'd struggle to come up with a faster way to burn shareholder wealth if you tried, but this stuff has become par for the course in corporate America.
Why are companies so bad at repurchasing their stock? I think there are three big reasons.
First, there's no reason to expect the CEO of, say, a cable company to also be a shrewd value-minded stock investor. Those are two completely different skills. That isn't an excuse for wasting shareholder money, but it helps explain the results.
Two, a lot of management compensation comes in the form of options. That's intended to align management's interest with other shareholders, but it can backfire and focus their attention on keeping stock prices propped up in the short run. One study by Liu Zheng and Xianming Zhou of the University of Hong Kong found that companies that issue the most options to executives are more likely to see "manipulations" of their share price, including being "more likely to conduct share repurchases."
The third is probably the most important. There are two ways to return money to shareholders: dividends and buybacks. Dividends are seen as the more sacrosanct of the two; once issued, companies hate cutting them. Buybacks are viewed as more transitory. Managers can buy back a few shares this year, none the next, a ton the following year... whatever. And investors are usually OK with it. Most dividend-paying companies have a policy of paying $X per share in dividends every quarter, and rarely stray from it. I don't know a single company that does the same for buybacks.
Now, buybacks shouldn't be consistent quarter-to-quarter if companies are good at buying low and selling high. But they're totally not. And so I have some advice for all companies that repurchase stock:
- Unless you have a proven track record of repurchasing shares at favorable prices, don't try to time the market. It's OK. Most people can't.
- Instead, either stick with dividends (almost always better than buybacks), or think about buybacks like you do dividends, repurchasing a set amount of stock every quarter as consistently as you can. Most individual investors are best-served by dollar-cost averaging, investing a set amount of money every month regardless of what the market's doing. Companies bent on repurchasing stock should probably do the same.
No need to apologize, Jamie. Just try not to do it again. And again. And again.