{"id":44283,"date":"2024-12-30T13:32:12","date_gmt":"2024-12-30T13:32:12","guid":{"rendered":"https:\/\/crowdfundjunction.com\/blog\/share-buybacks-dominate-2024-heres-why-not-all-buybacks-are-worth-it\/"},"modified":"2024-12-30T13:32:12","modified_gmt":"2024-12-30T13:32:12","slug":"share-buybacks-dominate-2024-heres-why-not-all-buybacks-are-worth-it","status":"publish","type":"post","link":"https:\/\/crowdfundjunction.com\/blog\/share-buybacks-dominate-2024-heres-why-not-all-buybacks-are-worth-it\/","title":{"rendered":"Share buybacks dominate 2024: here\u2019s why not all buybacks are worth it"},"content":{"rendered":"

(Originally posted on : Invezz )<\/b>
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Wall Street often celebrates when companies announce stock buybacks, seeing them as a vote of confidence in a firm\u2019s future. <\/p>\n

However, veteran stock researcher Bradley Safalow is sounding a cautionary note. <\/p>\n

A report by Barron’s<\/a> has put out Safalow’s argument that while buybacks can give a short-term boost to stock prices, their long-term impact is often less favorable, particularly for companies with financial or operational weaknesses.<\/p>\n

The buyback paradox: big spenders, underwhelming results<\/h2>\n

Safalow\u2019s research reveals a striking trend: companies with the largest buyback programs in the S&P 500 have underperformed the broader index over the past decade. <\/p>\n

In his note to subscribers of PAA Research, he likened stock buybacks to a \u201csugar rush\u201d\u2014a fleeting spike in share prices that often leaves companies weaker in the long run.<\/p>\n

From 2019 to 2023, S&P 500 companies repurchased a staggering $3.5 trillion worth of shares. <\/p>\n

However, much of that spending failed to significantly reduce outstanding share counts due to the offsetting effect of rising stock-based compensation. <\/p>\n

Only a small percentage of companies achieved a net share reduction of more than 4%.<\/p>\n

For companies with high debt or structural challenges, buybacks can be a poor use of capital. <\/p>\n

Safalow highlights examples such as ITT Educational Services and Big Lots, which spent over $1 billion on buybacks before eventually filing for bankruptcy.<\/p>\n

Poor timing: the pitfalls of buyback strategies<\/h2>\n

Safalow\u2019s critique aligns with academic research and insights from seasoned investors like Leon Cooperman, who have long observed that corporate managers often mistime buybacks. <\/p>\n

Companies frequently buy their stock when prices are high, only to pull back during downturns when shares are undervalued.<\/p>\n

\u201cMost management teams lack a clear understanding of their businesses\u2019 intrinsic value,\u201d Cooperman has noted. <\/p>\n

Safalow echoes this sentiment, emphasizing that buybacks should ideally occur only when a company\u2019s stock is significantly undervalued.<\/p>\n

Buyback outliers: companies that get it right<\/h2>\n

Despite the overall criticism, some companies have managed to use buybacks effectively, generating substantial shareholder value. <\/p>\n

Safalow identifies firms like AutoZone, Dillard\u2019s, and Build-A-Bear Workshop as prudent buyers of their shares. <\/p>\n

These companies have consistently repurchased stock at opportune times, contributing to strong performance relative to the S&P 500 and the Russell 2000 over the past five years.<\/p>\n

In December, Safalow published a list of \u201cBuyback Outliers\u201d\u2014companies that demonstrate disciplined buyback strategies, even during periods of market weakness. <\/p>\n

To qualify, these firms consistently generate free cash flow, achieve high returns on capital, and maintain low levels of share-based compensation.
Some of the notable names on Safalow\u2019s list include:<\/p>\n

Charter Communications:<\/strong> The cable operator has shown strategic timing in its buybacks, bolstered by strong cash flow.<\/p>\n

Williams-Sonoma:<\/strong> The retailer has outperformed thanks to disciplined capital allocation and prudent buyback activity.<\/p>\n

Etsy and Polaris:<\/strong> Among smaller firms, both companies have effectively used buybacks to enhance shareholder value.<\/p>\n

Stock-based compensation: an overlooked cost<\/h2>\n

One of Safalow\u2019s primary concerns is the role of stock-based compensation in distorting the true impact of buybacks. <\/p>\n

Many companies have successfully convinced Wall Street to exclude stock-based compensation when calculating adjusted earnings, despite it being a real cost to shareholders.<\/p>\n

At some tech and consumer discretionary firms, stock-based compensation exceeds 15% of operating cash flow, diluting the benefits of buybacks. <\/p>\n

Safalow argues that companies often use buybacks to mask these costs, creating a misleading picture of financial health.<\/p>\n

Lessons for investors<\/h2>\n

Safalow\u2019s findings offer important insights for investors navigating the buyback landscape:<\/p>\n

Be skeptical of large buyback programs:<\/strong> High buyback spending doesn\u2019t necessarily equate to strong long-term returns.<\/p>\n

Evaluate management\u2019s timing and strategy:<\/strong> Look for companies that repurchase shares when prices are low, rather than chasing high valuations.<\/p>\n

Prioritize cash flow and capital efficiency:<\/strong> Firms with disciplined capital allocation and limited stock-based compensation are more likely to deliver sustainable returns.<\/p>\n

For investors seeking opportunities, Safalow\u2019s \u201cNice List\u201d of Buyback Outliers could serve as a starting point. <\/p>\n

These companies demonstrate that, when executed thoughtfully, buybacks can still be a valuable tool for enhancing shareholder value.<\/p>\n<\/p>\n

The post Share buybacks dominate 2024: here’s why not all buybacks are worth it<\/a> appeared first on Invezz<\/a><\/p>\n

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(Originally posted on : Invezz ) Wall Street often celebrates when companies announce stock buybacks, seeing them as a vote of confidence in a firm\u2019s future. However, veteran stock researcher Bradley Safalow is sounding a cautionary note. A report by Barron’s has put out Safalow’s argument that while buybacks can give a short-term boost to […]<\/p>\n","protected":false},"author":3947362359,"featured_media":44284,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"om_disable_all_campaigns":false,"_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0},"categories":[37],"tags":[],"_links":{"self":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts\/44283"}],"collection":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/users\/3947362359"}],"replies":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/comments?post=44283"}],"version-history":[{"count":0,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/posts\/44283\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/media\/44284"}],"wp:attachment":[{"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/media?parent=44283"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/categories?post=44283"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/crowdfundjunction.com\/blog\/wp-json\/wp\/v2\/tags?post=44283"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}