Why Apple’s $60 Billion Buyback Isn’t a Buy Signal
An announcement of a big stock repurchase program often creates immediate buying in those shares, because ostensibly, that’s a knowledgeable authority saying the shares are worth more than the current trading price. But as a practical matter, there’s little point in attempting to match investment buying to a company’s own stock buybacks. In fact, sometimes investors are better off buying shares after the company pauses a share repurchase program rather than when it makes its first buyback.
Consider Caterpillar (CAT), a company with a pretty good record of predicting its own financial fortunes. In February 2007, it authorized $7.5 billion of stock buybacks. By last week, it had spent about $3.8 billion of that money, having halted its repurchases at the end of 2008. But look at where investors got rich in Caterpillar: right after the company stopped shopping its own shares.
Note in the stock chart that investors who bought Caterpillar shares at the repurchase announcement in February 2007 made a nice little 30% gain in the few months after but were about where they started by the beginning of 2008. Contrast that to someone who invested in Caterpillar post-company repurchasing. Let’s say he bought shares after the first quarter 2009 reports showed no corporate repurchasing the previous quarter. That investor saw the value of his shares nearly double in the following six months. There was a 121% gain by the end of the first year and had gone to a 200% gain by May 2011.
Investors who followed Proctor & Gamble (PG) into the market for its shares in late 2009 probably weren’t expecting the share price to virtually flatline over the next two and a half years. Proctor & Gamble’s share price didn’t really move until the beginning of 2013, we see in a stock chart, when it rose with the popularity of consumer staples stocks generally. We don’t have figures for its first quarter stock buybacks yet, but we would expect to find that the repurchase program was cut down or paused that quarter.
The Caterpillar and Proctor & Gamble examples are not meant as actionable advice – you are not going to get rich looking for the tail ends of repurchase programs. Rather, these experiences show the pitfalls of putting too much faith in share buyback programs as predictors of share price trends. Companies initiate repurchase programs for all sorts of reasons, many of which have nothing to do with a belief that the shares are undervalued, and they rarely share their motives with investors.
Announcements typically peg the amount of money to be (maybe) spent, but then provide only vague parameters of timing, usually spanning years. Investors might expect share price gains to result, but that’s not necessarily the company’s expectation. Caterpillar miscalculated badly if it thought its shares in 2009 were going to be worth more than the $70-plus it paid for them in 2007. Perhaps P&G was using share repurchases not because it saw its shares as undervalued, but because it knew they would need some support ahead to avert a share price plunge. We can only speculate.
Certain share repurchases can be very lucrative for investors, as they increase total returns by reducing outstanding shares. YCharts’ Carla Fried explains how to look for buyback related investments, including calculations that help value the impact of such a program on returns.
Apple (AAPL) announced Tuesday it will buy back $60 billion of its shares, which is the largest repurchase plan in history. Caterpillar announced this week plans to start share repurchases aimed at taking out some $1 billion of market capitalization. CSX (CSX), AT&T (T) and several other major companies have announced new buyback programs recently. They are all worth investigating. But there’s no reason to rush the research.
Dee Gill, a senior contributing editor at YCharts, is a former foreign correspondent for AP-Dow Jones News in London, where she covered the U.K. equities market and economic indicators. She has written for The New York Times, The Wall Street Journal, The Economist and Time magazine. She can be reached at firstname.lastname@example.org.
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