When Companies Buy High and Sell Low

At least so far, March has represented the absolute low point in the market's protracted decline. From the beginning of the year to its nadir on March 9, the S&P 500 fell by more than 25%. And from its peak in late 2007, the move represented more than a 56% decline in value.

With such a valuable opportunity, you'd have expected to see companies buying back shares hand over fist. Apparently, though, the idea of buying low and selling high hasn't penetrated the executive suites just yet.

According to a new report by Standard & Poor's, stock buybacks among S&P 500 companies fell by 73% in the first quarter to just $30.8 billion. That marks the fifth straight quarter of declining share repurchases. Compare that to the third quarter of 2007, when the companies making up the S&P 500 bought back a record $172 billion worth of stock.

In reality, the report is even more damning than it looks. More than a quarter of the entire amount of stock repurchased came from ExxonMobil (NYSE:XOM), which bought back some $7.85 billion in the first quarter. Here are the other billion-dollar buybacks from the period:

Source: Standard & Poor's.

As you can see, once you consider these big purchases, you'll see just how little buyback activity there was when stocks were at their cheapest.

Buyback hype is bull
It's no secret that I'm not the biggest fan of share buybacks. Last year, I argued that their status as a bullish indicator is outweighed by a company's ability to use them to manipulate earnings. Unless you actually sell your shares into a buyback, you get only a slightly bigger slice of the corporate pie -- and often, the dilutive effects of stock options actually leave you with less.

Obviously, tight credit has contributed to the dearth of buybacks lately. Companies want to make sure they have enough cash on hand to make it through this recession, so spending money on buying their stock in this environment might not make the most sense. But it's equally true that when credit was easy and companies were borrowing millions to chase their stocks up, managers often used the excuse that their shares were the best places to deploy their excess cash. Now when stocks look a lot more like screaming values, executives won't pull the trigger.

At least Sears Holdings (NASDAQ:SHLD), which has spent billions of dollars on its shares in recent years at far loftier valuations, was able to find enough spare change during the quarter to buy back just less than a million shares. The company spent an average of $41 a stub on its stock -- a nice discount to the $65 they fetch today. Still, I wish Sears Holdings had saved some of the money it spent on pricier shares in years past and made a bigger purchase now.

A policy that pays dividends
Sure, there are times when it's smart for a company to buy back stock. But if a company really wants to return value to shareholders, I'd much prefer to see that company commit to solid dividend payments. With the vast majority of investor gains in stocks coming from dividends, I'd prefer that companies show me the money directly -- and also give me an incentive to wait for the capital appreciation that company executives always say is coming right around the corner.

Investors are often accused of not using enough discretion when buying shares, of chasing up a stock, or of selling at the bottom. It seems that when it comes to stock buybacks, the managers of the companies we're buying aren't much better than we are.