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Profit
From Buyback Announcements
You may be
able to improve your stock returns by focusing on firms that are buying
back their own shares. But be sure your companies are actually doing it
rather than just talking about it.
My interest
in the subject was piqued by an April 2002, MSN Money (moneycentral.msn.com/investor)
column by Victor Niederhoffer, a well-known investor, and author of the
best selling “Education of a Speculator.” In the column, written
with financial writer Laurel Kenner, Niederhoffer gave a variety of
reasons why companies buying back shares should outperform the market.
For me, the
most compelling reason involves the earnings per share (EPS) figure many
investors rely on to value stocks. Since EPS is net income divided by
the number of shares outstanding, other things being equal, reducing the
number of shares increases the earnings per share. In the column
Niederhoffer listed 13 companies that had announced stock buybacks
during the first three months of the year.
I tracked the
performance of 12 of the 13 Niederhoffer buyback stocks from the column
date (April 18), through last Monday. I omitted one pick, Tenet
Healthcare. Tenet’s share price recently lost more than 70 percent of
its value due to a variety of reasons, including top executive
resignations and reports that the FBI is investigating allegations that
two Tenet doctors performed unnecessary heart-bypass operations.
Obviously, such issues overwhelm any advantages accruing from share
buybacks.
Niederhoffer’s
remaining 12 picks lost 10 percent, on average, over the almost
seven-month period. By comparison, the overall market as measured by the
S&P 500 index dropped 22 percent during that time.
Niederhoffer
listed stocks that had announced stock buybacks, meaning that the board
of directors has authorized management to buy the firm’s own shares on
the open market. However, these companies are not legally bound to
actually make the announced purchases. Firms often purchase fewer shares
than originally announced, and they sometimes they cancel the entire
transaction.
You can find
out if a company is following through on its buyback announcement by
checking the “total common shares outstanding” figure listed near
the bottom of its quarterly balance sheet. A share buyback should be
reflected in fewer shares outstanding in the quarters following the
buyback announcement. Not all sites’ balance sheets show the number of
shares outstanding. MSN
Money and Multex Investor (www.multexinvestor.com)
are the best places to find the data.
When I
checked, only seven of the 13 companies on Niederhoffer and Kenner’s
list had significantly reduced their shares outstanding total. Three
actually had more shares out than before their buyback announcement.
Do stocks
that actually do buy back shares outperform the market? I used resources
provided by Multex, operator of Multex Investor, to compare the
performance of two portfolios.
-
My
“all stocks” portfolio included all U.S. listed stocks with a
$50 million market capitalization (share price multiplied by shares
outstanding), and trading at a $1 or higher share price, 4,525
stocks in all.
- My
“buyback” portfolio included only companies from the “all
stocks” list that had reduced their shares outstanding count by at
least 10 percent during the previous 12 months. Only 735 firms made
the cut.
To compare
the performance of the two portfolios, I tallied the percentage of
stocks that moved significantly up or down (20 percent or more) over the
12-month period ending November 6.
I found that
39 percent of the “buyback” firms moved up significantly compared to
only 25 percent of the “all stocks” portfolio. Equally noteworthy,
only 15 percent of the “buyback” stocks dropped significantly,
compared to 31 percent of “all stocks.”
Summing up,
on a percentage basis, compared to “all stocks,” 56 percent more
“buyback” stocks went up (39 percent vs. 25 percent), and only half
as many dropped during the one-year test period.
My test
covering only a single one-year period is hardly rigorous by academic
standards. But the buyback portfolio’s out performance gets my
attention, and I’ll go with it until I find compelling contrary
evidence.
You can see a
list of recent buyback announcements on RealTimeTraders.com.
Look for it in the Calendars’ section of the site index.
You’ll
do best by focusing on stocks that actually follow through and buy back
significant shares, as shown by the balance sheets’ shares outstanding
figures, as opposed to those that have simply announced a buyback.
published
11/17/02 |
