Saturday, 25 October 2014

Share Buybacks vs Insider Buying

Good article in The New York Times: "Stock Buybacks Demystified".

Some snippets:

Corporate insiders have impeccable timing when buying stock for their own accounts. When the ratio of insider buying to selling is higher than normal at many companies at the same time, it tends to be near a market low.

That was the case in late 2008 and early 2009, toward the end of the last bear market. The ratio was at historically high levels for months, just before stocks tripled, according to Vickers Weekly Insider, a service that tracks such trading.

But when bosses authorize buybacks — buying stock on behalf of their companies, not themselves — they show nothing like the same foresight. The $617 billion that companies in the Standard & Poor’s 500-stock index spent on buybacks in the 12 months through January 2008 was the highest amount in the nine years for which the research firm FactSet has compiled such data.

That was just in time for the worst market decline since the 1930s. The following year, a more auspicious time to accumulate stocks, buybacks totaled $353 billion.

“Insiders, when buying for themselves, are not looking at the present; they’re looking at the future. Buybacks are done for the present; cash flow is high, so they use it for buybacks. That drives them in good times and bad.”

Buybacks tend to be done late in an uptrend because that’s when there are fewer attractive alternatives for spending money and the greatest need to lift earnings. But that’s also when stock valuations are high. If companies borrow to accomplish their buybacks, as many do, it leaves them even worse off when the cycle turns down because they have more debt on their books, he added.

I have never been much of a fan of share buyback programs. I have seen enough cases in which these programs were abused, for instance :
  • A share price was "defended" at some artificial price level. When the money for the share buyback program ran out the share price crashed, not unexpectedly. The company should have let the share price go down, enabling it to buy more shares at a cheaper price, for the advantage of all remaining shareholders.
  • An aggressive share buyback program exactly at the moment that insiders are selling the share. There is the perception that the share price is artificially supported, enabling insiders to receive a higher price than they otherwise would have.

Share buybacks have been invented in the US, having had a double taxation on dividends.

Asian countries don't have this double taxation, so they can freely distribute excess cash in the form of dividends. There is here actually not much need for share buybacks (with this being a possible exception).

I prefer dividends over share buybacks:
  • Dividends are much more transparent, an overview of the dividends paid out in (say) the last ten years is quite insightful in evaluating a company.
  • Share buybacks are distracting, both for the management which has to execute it (dealing on a daily basis with price and volume), and for the shareholders who have to evaluate it in combination with the dividends.


  1. There are announcements on Bursa of companies buying back a few thousand shares. Why do they do this? Are these genuine share buybacks or are these to close the price up? It's puzzling.

    The other practice is substantial shareholders to buy and sell their shares in the same market day. Why do they do this?

  2. I agree, small share buybacks are definitely not worth the trouble, so why do they do them?

    Substantial shareholders, you mean EPF? I was also puzzled by this in the past, but someone commented that they have several fund managers, who might have a different opinion about a company, one might be selling while another might be buying. Bit strange, I would guess they could handle this internally and save on the commission.