Does This Buyback Plan Make Any Sense?

OLED expert Universal Display (NASDAQ: OLED  ) hasn't been kind to its shareholders lately. Share prices have plunged 25% since the company reported disappointing third-quarter results, and the stock is down 58% from the 52-week highs of $55 per share.

The company's board of directors saw these negative price trends and decided it was time to take advantage of the soft market. Universal Display just announced a $50 million share buyback program, which at current prices would take about 5% of its shares off the market.

"This stock repurchase program demonstrates the confidence that our board and management team have in the prospects and growth potential of the company," said CEO Steve Abramson. The buybacks will be funded from Universal's working capital reserves.

And that's where I raise a skeptical eyebrow. As a Universal shareholder myself, I'd prefer that the company would hold off on buybacks until it can afford to do it with free cash flow money. And that's not the case at all:

PANL Free Cash Flow TTM data by YCharts

Positive cash flows are a pretty new experience for this small cap. You see that generous cash balance, from which management intends to fund the buyback? Yeah, that's what remains of the $250 million secondary offering the company did in 2010. The buyback isn't so much about rewarding shareholders, but more like a paying down bits of a very large loan.

You could, of course, take the program at face value. What if Abramson and company see $50 million of free cash coming in over the next year or so? That would be a drastic jump from the current $13 million run rate. In that case, share prices will surely soar as the fresh cash is unveilled -- making later buybacks a pretty inefficient alternative.

But nobody is promising anything here. And maybe you missed this, but company leaders actually waste more shareholder value than they create in the average buyback.

Fellow Fool Morgan Housel pointed out that even financial masters like JPMorgan Chase (NYSE: JPM  ) tend to roast their capital in the open market. Closer to home for yours truly, Netflix (NASDAQ: NFLX  ) famously bought back a ton of shares at high prices only to sell them back again at a much lower valuation. This is the polar opposite of "buy low, sell high."

Will Universal Display bungle this buyback, too? Only time will tell. I agree that the stock looks cheap nowadays, but the company could certainly find better ways to put its cash to work.

The precipitous drop in Netflix shares since the summer of 2011 has caused many shareholders to lose hope. While the company's first-mover status is often viewed as a competitive advantage, the opportunities in streaming media have brought some new, deep-pocketed rivals looking for their piece of a growing pie. Can Netflix fend off this burgeoning competition, and will its international growth aspirations really pay off? These are must-know issues for investors, which is why we've released a brand-new premium report on Netflix. Inside, you'll learn about the key opportunities and risks facing the company, as well as reasons to buy or sell the stock. We're also offering a full year of updates as key news hits, so make sure to click here and claim a copy today.

Read/Post Comments (3) | Recommend This Article (3)

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 November 14, 2012, at 5:43 PM, TMFSymington wrote:

    Ah! Your article beat my blog post to the punch, but it's interesting I'm taking the opposite stance on this one:

    Nonetheless, that's why they put the "Motley" in The Motley fool, right? I appreciate your thoughts as always, Mr. Bylund.

  • Report this Comment On November 15, 2012, at 2:08 AM, sidneyleejohnson wrote:

    I'll have to side with Steve on this..he elaborates more specifically what the secondary was for and the fact it left significant $ left over... but most importantly is the fact that most people can't explain how an IP/R&D firm like panl is suddenly going to be able to employ efficiently and appropriately large amounts of excess cash to expand its business internally through new hires of a very small pool of global chemistry talent. If there are no acquisitions of patents or other firms then a buy back makes complete sense. The idea that they can just scale their r&d investments internally with input from the extra cash is folly. There is simply not enough oled related talent available in the world for UDC to just rain the extra cash upon... so give it back to shareholders by buying it back at significantly lower than what you sold it for.. Brilliant.

  • Report this Comment On November 15, 2012, at 2:29 AM, sidneyleejohnson wrote:

    One last comment, I would really like to see the study on the impact of buybacks when the Institutional ownership >100% of the float. If UDC for example were able to buy back shares directly from Fidelity and Vanguard the largest sources of Securities Lending BY FAR what impact would it have on the gigantic short position on UDC? It would be the mother of all short squeezes as F&V would issue recalls and the shorts would have no where to cover from...

Add your comment.

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: 2112887, ~/Articles/ArticleHandler.aspx, 10/23/2016 2:34:31 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 1 day 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
OLED $49.59 Down -0.84 -1.67%
Universal Display CAPS Rating: ****
JPM $68.49 Up +0.23 +0.34%
JPMorgan Chase CAPS Rating: ****
NFLX $127.50 Up +4.15 +3.36%
Netflix CAPS Rating: ***