In 1999, Warren Buffett said:
‘Now, repurchases are all the rage but are all too often made for an unstated and, in our view, ignoble reason, to pump up or support the stock price. The shareholder who chooses to sell today, of course, is benefited by any buyer, whatever his origin or motives. But the continuing shareholder is penalised by repurchases above intrinsic value. Buying dollar bills for $1.10 is not good business for those who stick around.’
I was reminded of the above when reading a recent article in The Economist (March 20-26th p71) about the recent surge in share buybacks by US companies. This was highlighted by Pepsi’s recently announced $15 billion share buy-back plan. It is suggested that a reason for this increased repurchase activity is that firms have emerged from the recession with plenty of cash but are pessimistic about the economic outlook so don’t want to invest in organic or acquisitive growth.
After such a strong recovery in share prices over the last 18 months, Warren may have cause for concern about valuations. Given the choice of a special dividend or payout uplift or share buyback, I’ll go for the cash in hand any day. Companies have two ways of rewarding an investor – through an increased share price and through dividends. Benjamin Graham’s “Mr. Market” ensures that share prices are unpredictable and in the short term not necessarily related to the qualities or performance or a business. A share buyback may not reward the shareholder in the short or even medium-term but a dividend certainly will and an attractive dividend policy will help underpin the share price and perhaps diminish a little Mr. Market’s powers.
Hi Ashly
Personally I am not in favour of share buy-backs. In the main, they are a waste of money to small shareholdings.
Best regards
Steven Dotsch
Editor
http://www.early-retirement-investor.com
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