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  1. Home
  2. / Investing
  3. / Transportation

Delta Air Lines' Art of the Bad Buyback

Is purchasing your company's stock at 32x earnings just plane nuts?
By SHAM GAD May 14, 2015 | 12:35 PM EDT
Stocks quotes in this article: AAPL, IBM, DAL, AZO

I hate to admit, but so many actions taken by companies in order to enhance shareholder value are doing anything but. Sure, the shares may move ahead in the short-run, but that only benefits those lucky enough to time the market correctly. 

Perhaps the activity that's so often misused is the stock buyback. This week, Delta Air Lines (DAL) announced it was returning some $6 billion to shareholders via buybacks and dividends. Naturally, the general consensus is joy that this capital is being "returned" to shareholders. Today, Delta shares are trading for $47 -- near their 52-week high of $51. But when I look back at a 10-year chart of Delta's stock price, I find that the stock has never traded anywhere near today's price prior to the past six months or so. Euphoric shareholders and analysts might also want to take pause before rejoicing at the company purchasing shares back at around 32x earnings. 

To be sure, these are wonderful times for airlines. Fuel costs have come down significantly thanks to lower oil prices, yet ticket prices have remained very robust. Industry consolidation over the past couple of years has also created lots of monopoly-like routes for many carriers. All of these characteristics provide a favorable tailwind to airline profits and equity valuations right now, but sudden changes could create havoc to profitability and send shares lower. 

It's also not surprising that share buybacks are reaching record dollar amounts. Companies are flush with cash, interest rates are basically zero and any news of share buybacks makes investors happy. In age where most CEOs are on alert for activist shareholders, anything to prop up a stock's price is considered intelligent regardless of its long-term effects.

Not all buybacks are bad, but most are done at precisely the wrong time. On the other hand, buybacks by Apple (AAPL) and IBM (IBM) stand out to me as examples of true long-term, value-creating capital-allocation tools. Anyone interested in appreciating the true value of a sound buyback program can also look at AutoZone (AZO) and its share performance over the past 10 years, along with the company's number of shares outstanding.

But not all buybacks are created equal, and investors shouldn't sing Kumbaya at the mere announcement of one.

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At the time of publication, Gad had no positions in the stocks mentioned.

TAGS: Investing | U.S. Equity | Transportation

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