share buybacks

Uncle Carl is loving the totally legitimate diet-shake company’s $266 million share buyback. Bill Ackman hasn’t weighed in on the racist pyramid scheme’s move, but it is safe to say he’s not impressed. Read more »

The beginning of a new year seems to be a popular time to check in on Warren Buffett for some reason, perhaps because a lot of people’s New Year’s resolution is “invest more like Warren Buffett”? Sure, why not. So how’s he doing?

Warren Buffett’s bet on Bank of America Corp. and a more-generous buyback plan helped his Berkshire Hathaway Inc. beat the Standard & Poor’s 500 Index in a year when he didn’t make a major acquisition.

Class A shares advanced 17 percent last year, beating the 13 percent gain in the S&P 500. … Book value may have climbed to $113,579 a share on Dec. 31, according to an estimate from Meyer Shields, an analyst at Stifel Nicolaus & Co. That would give Buffett’s firm a 7.8 percent annual growth rate for the five years ended 2012, compared with 1.7 percent for the S&P 500, including dividends.

Yay. It’s worth noting that his buyback was controversial when it was announced like three weeks ago, but the stock is up by 6.5% since then, yielding Buffett a three-week $80 million profit.

Buffett has also made untold gazillions of dollars on his investment in Bank of America preferred and warrants in 2011. I feel like this passage, from today’s “Heard on the Street” column dithering about whether BofA should buy back the preferred stock, provides some clue as to why: Read more »

  • 20 Mar 2012 at 12:49 PM

Today In People Who Don’t Need Your Capital

I’ve sort of resisted writing about Apple’s capital return thingy because, yeah, that basically makes sense, they have more money than they know what to do with and more coming in each day, so their choices are pretty much (1) give some of it back, (2) find something super-awesome to spend it on, (3) find something dumb to spend it on, or (4) engage in weird experiments in macroeconomics and/or exponential growth where they end up having more money than there is in the world. I don’t have any super-awesome ideas to spend it on (and also I trust Apple to know better than I do what it’s good at doing); spending it on dumb things seems … dumb; and I don’t think the weird experiments will work though you never know! That leaves “give some of it back.” So you can say something like “yeah this makes sense” or “I would’ve done it slightly differently,” or you can go and say something silly. Like:

Gregory Milano of Fortuna Advisors, which advises Fortune 500 companies on maximizing their market value, did some quick math. Milano considers buybacks to be like any other investment a company can make. Buybacks must offer a good return in order to be deemed a smart use of capital. That is, if a company buys its stock at $10 a share and it rises to $12 next year, it’s earned a 20% “return on investment” for shareholders. Because the average business’s capital costs run 10% a year, between debt and equity expenses, most companies should seek buybacks to return more than 10% a year if they want to build shareholder profit.

In Apple’s case, returns on capital are extraordinary. The tech giant earns around a 40% return on its operating capital, far exceeding its capital costs. So what’s a good hurdle rate, or minimum rate of return, for its buyback? Milano thinks a 20% “return on investment” is fair.

For the buybacks to deliver that return, Milano says Apple’s stock price will have to rise 128% to $1,368 over the next five years. For a meager 10% buyback return, the stock needs to hit $984 in five years.

Can the stock reach those heights?

You make the call! I will not be making that call because feh. Here is my model of Apple: Read more »

If you run an investment bank, which basically takes a cut of economic prosperity, it’s good to have a backup plan for when there’s not so much prosperity. So you try to build some countercyclical businesses. In boom times you lend lots of money to people to let them buy McMansions. In crises you make lots of money on widening bid/ask spreads and volatility. In recessions you, I don’t know, get free money from the Fed and hunker down and ZIRP and buy gold! That’s the theory. Sometimes it doesn’t work.

Now of course that theory is not equally good for everyone in all of those businesses. The ranks of cupcake bakers and artisanal dog walkers these days are filled with former MBS structurers. Guys who set up distressed commercial real estate funds in 2009 were often shut out of the market by the time they’d raised money.

The smart move is to be in a business that makes money in boom and bust. Some whole firms look like that. Places like Lazard and Greenhill are basically in two businesses, M&A and bankruptcy, and bankers who can do both well are relatively insulated, stitching together big levered deals in the good times and selling off the bits when they go bankrupt. I worked in a group that did both equity-linked issuance and stock buybacks. Buybacks tend to be done when companies are flush with cash and investment opportunities are limited; equity-linked securities often come from companies that are a bit down on their luck but still have ways to put money to work. So you’ve gotten long some economic volatility, and you’ve got both peaks and troughs covered.

But, of course, if someone is making money both ways, then someone is losing it both ways. Companies build empires at expensive prices and divest them cheaply, paying transaction costs both ways. And boy do they ever sell stock low and buy it high. Still, it is rare to see an illustration of that quite as breathtakingly perfect as Netflix’s announcement yesterday that it was issuing $400 million of equity and convertible bonds, after spending most of the last year and a half buying back stock. Now, first of all: Read more »

Markets got you down? Can’t seem to keep up with your benchmark this year? Not sure you’ll ever figure out this whole buy-low, sell-high thing that you keep hearing rumors about? Cheer up, you’ve got good company. Company anyway. Specifically, corporate America, whose overall market timing ability is much worse than that of a chimp who watches Art Cashin.

That’s what McKinsey coldly concluded, noting that from 2004 to 2010, “Only 31 percent of the [S&P 500] companies earned a positive return from buying back shares—less than you would expect from a random throw of the dice.” And not only did two out of three companies underperform putting cash under a pillow; three out of four underperformed dollar cost averaging:

Read more »