Back in April and May, we riffed on the broad effects of shrinking supply--courtesy of furious M&A, private equity, and share repurchase activity--on equity prices. Whatever the macro effects of declining supply may have been, a new Standard & Poor's study suggests the micro-level effects of share buybacks on individual securities leave something to be desired.
Here are the highlights from today's PR Newswire account of the S&P research, which was published today:
While 2007's record-setting stock repurchasing activity may make it the "Year of the Buyback," a recent Standard & Poor's Equity Research study shows this widely practiced strategy to boost company share prices may not lead to the anticipated positive benefits. In fact, Standard & Poor's Equity Research's look at corporate share repurchases among S&P 500 companies over the last 18 months showed that only one of out every four S&P 500 companies (103 companies) that repurchased shares outperformed the Index, while the remainder would have been better off putting their excess cash into an S&P 500 Index exchange-traded fund. This was among the findings from the Standard & Poor's report titled, "How Rewarding Is Corporate Share Repurchase Activity?" which was published today.
"The tendency is to assume that corporate share repurchases lead to a sustained uptick in stock performance, and the more activity the better," note the study's authors, Stewart Glickman, Associate Director, and Todd Rosenbluth, Senior Associate Director, Standard & Poor's Equity Research. "While these initiatives may create a positive aura around a company's shares, our study showed an inverse link between repurchase activity and the returns achieved - the companies that used buybacks most aggressively actually generated the weakest returns over the course of the study period. Based on these findings, we recommend shareholders take a close look at a company's buyback history and their results before bidding up share prices."
"S&P Equity Research undertook this analysis to assess the conventional wisdom on buyback activity and question the decision-making process when using large amounts of shareholder funds for this purpose," said Stephen Biggar, Global Director of Equity Research for S&P. "We believe that share buybacks may sometimes be a subtle admittance by managements that re-investing in their core operations does not represent a good opportunity. Therefore, we are not surprised that some of the most aggressive repurchasers on our list had the worst track records.
Given the mass of analysis swirling around the financial markets, trends in asset prices tend to be over-explained in retrospect (and under-understood in prospect). As the market bucked higher this year, share buybacks--both announced and completed--were a convenient explanation for rising prices. Thanks to S&P's important research, that conventional wisdom--at least at the company level--is due for some serious revision.
UPDATE: Here's a little more detail from Rosenbluth and Glickman at BusinessWeek.com.