Stock buybacks are still bad for investors

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M.A. Gumport of MG Holdings has published the July 2010 edition of the Buyback Monitor, showing corporate stock profits for 275 firms over the period 2000-2010.

Here is the summary of this study:

This report updates and expands earlier studies to look at the profitability of $349.7 billion of buybacks executed from 2000 through early 2010 by a sample of 275 corporations. The sample companies, drawn mainly from the technology sector, enjoy total equity market value today of $945.6 billion.

The evidence against the wisdom and fairness of stock buybacks continues to build, but the Main Stream Media still doesn't understand.

In the past decade, 67.3% of sampled companies engaged in buybacks. 35.7% of sampled corporate stock buyback programs are currently profitable (64.3% are unprofitable). Without buybacks, share prices for the group now would be at least 5.3% higher (nearly 10% higher after adjustment for foregone interest income). In part because buybacks by less numerous larger companies did better than those of more numerous smaller companies, the typical company suffered a bigger stock price penalty from losses on buybacks in the past decade than the group overall.

Companies with equity market value at least near $1 billion who, priced today, executed the most profitable buybacks during the past decade include, in rank order, CRUS, CY and CTXS. Shareholders of each of these companies received a stock price benefit of at least close to 20% due to corporate profits on buybacks. Other major companies whose buyback profits boosted share prices by at least close to 10% include POWI, ADSK, FLIR, STEC, ORCL, EMC, APKT, OVTI, ARRS and NTAP.

Companies with equity market value at least near $1 billion who, priced today, executed the most unprofitable buybacks during the past decade include, in rank order, CDNS, DELL, IDTI, NSM, ISIL, MOT, MXIM, KLAC, and AMAT. Absent buybacks, share prices of these firms today would be at least 21% to 98% higher. Buyback losses of a few, smaller companies (ZLC, ENTN, DITC, ADPT) inflicted even greater damage on share prices.

Gumport, M. A., The Buyback Monitor – July 2010: Corporate Stock Buyback Profits of 275 Firms 2000-2010 (July 6, 2010). Available at SSRN: Abstract 1635485

No reform of buybacks yet

Despite the growing evidence based on studies like those of M.A. Gumport (above) or Professor William Lazonick, or Professor Alfred Rappaport or the opinions of respected investment experts from Warren Buffett to Benjamin Graham, the US Securities and Exchange Commission has made no move to repeal SEC Rule 10b -18 and the question of buybacks was not even mentioned in all the discussions leading up to the Dodd-Frank Act.

Since Barney Frank and Chris Dodd did not feel it necessary to take action against the notorious behavior of Fannie Mae and Freddie Mac, it is not surprising that they have no interest in protecting investors against buyback fraud,

The lack of attention to protecting long-term investors against the massive fraud of stock buybacks is just one more sign that it will be some considerable time before the US works its way out of the present financial morass.