2 Lousy Stock Repurchase Programs
I recently wrote an article in which I discuss the pros and cons of stock repurchase programs. I then followed this article up with another in which I point out two successful buyback programs — that of Lorillard (NYSE:LO) and that of CSX (NYSE:CSX).
Both of these companies bought back stock while their revenues and profits were rising. It also paid and raised its dividends while it was buying back stock. Each company has strong, predictable businesses that don’t require it to keep large amounts of capital on hand. Finally, the two companies slowed down its repurchases when its share prices rose. In short, the two companies used buybacks to generate shareholder value.
But while we can point to these success stories in order to justify buybacks, we need to address the dark side of share repurchases. One thing that a share repurchase program can do is increase the stock price in the near-term. This spike often drives in speculators and momentum traders who are interested in short term gains. Unfortunately, in such scenarios we can find dishonest executives and fund managers taking advantage of these short-term price spikes in order to unload stock.
When you look at a company with a share repurchase program, you need to make sure that the company is not defending its share price or buying stock from insiders. In order to spot these share repurchase programs that destroy value, we should take a look at a couple of examples.