When Did Share Repurchases Become a Crime?
Ten years ago, I did a lot of investing into individual stocks. While my investing these days is mostly limited to mutual funds, one thing that always attracted me was when a company bought back shares of their own stocks. To me, this always signaled confidence in the company, and a belief from insiders that the stock would perform well in the near future. While there are some who feel that stock buy backs are what companies do when they don’t have very good investment prospects for their cash on hand, share repurchases always made perfect sense to me. If I were the CEO of a company, and I felt like my company was undervalued, share buy backs are going to be one way of enhancing shareholder value.
Yet the stock buy backs from Big Oil are often talked about as if they were reprehensible:
“Oil companies today are enjoying record profits, and while they could use those profits to invest in more production capacity, instead they use the money to buy back shares in the markets,” complained Rep. John Conyers Jr., D-Mich., the panel’s chairman.
High energy prices are translating directly into record oil company profits. In the first six months of 2006, the five largest U.S. oil companies posted $59.4 billion in profits. These companies have spent $112 billion since 2005 to buy back their own stock and pay dividends rather than invest in infrastructure or alternative energy sources, according to analysis done by Public Citizen.
The amounts that oil companies invest in alternative energy typically pale in comparison to some of their other expenditures.
Exxon spent $19.9 billion in 2006 on capital expenses and the hunt for more oil. It also paid $29.6 billion to buy back some of its own stock, a move meant to reward investors by increasing the value of outstanding shares. The company’s annual profit hit $39.5 billion, the most ever for an American company.
Chevron spent $16.6 billion in 2006 on exploration and capital expenses, which include maintaining refineries, pipelines and other facilities worldwide. The company spent $5 billion on buying back stock. Chevron made a $17.1 billion profit for the year.
ConocoPhillips spent $16.3 billion on exploration and capital expenses, and $925 million on buying back stock. The company’s 2006 profit topped $15.5 billion.
Yet if Home Depot or Best Buy announce stock buy backs, there is no public outcry. CNN’s take on it is more to my liking. In the wake of ConocoPhillips’ announcement yesterday of a $15 billion share buy back, CNN wrote the following:
Shareholders of two blue-chip companies, as well as investors generally, were treated Monday to a bit of good news that carries potentially bullish long-term consequences.
First, Johnson & Johnson (JNJ) announced that its board of directors had authorized the repurchase of up to $10 billion of its common stock.
Then, later in Monday’s trading session, ConocoPhillips (COP) announced that its board had approved a $15 billion share buyback program, representing an increase of $13 billion above and beyond the $2 billion that remained in a previous buyback program.
These announcements are good news because the average company that repurchases its shares outperforms the market by an annualized average of 3.1% over the four years following the announcement of its share repurchase program. That’s the finding of perhaps the most comprehensive academic study of repurchase programs, which appeared in the Journal of Financial Economics.
Why would repurchases carry such bullish potential? One theory explains it in terms of simple supply and demand: Repurchases reduce the supply of a company’s stock outstanding, which according to Economics 101 should increase the price of those shares that remain.
Another theory: Companies that repurchase their shares are so confident about their future prospects that they are willing to commit corporate resources to buying them. This is worth paying attention to, since a company’s executives and Board of Directors have access to insider information that the rest of us do not.
I am sure we will be treated to a lot of negative stories about the COP buy back, but I don’t suspect the same is true of the J&J buy back. That will be viewed as a shrewd move by their CEO.