I managed to get myself in another argument about stock buybacks last night. Since there was no baseball game on to distract me and the wife was at the airport as she returned from a visit to Annapolis over the long weekend, I had nothing to distract me.
I called an old friend who is something of a perma-bull, a stance that has rewarded him generously over the years. I find it very useful to check in with him from time to time to help offset my natural short-term cynicism. One of his key points right now is the high amount of buyback activity that is going on today and how wonderful this should be for stock prices.
While stock buybacks may be good in the short term, I think they are one of the most overused and potentially damaging tools corporations have at their disposal. Using shareholder cash to buy back stock to offset stock-based compensation schemes or buying back stock at high valuations of earnings and book value or at enterprise values whole above the market mean is just plain mismanagement, in my opinion. Borrowing money to buy back stock at high multiples is an even more egregious sin, in my eyes. The money has to be paid back someday and if you overpaid for the shares, we as shareholders got nothing for the money spent and interest paid.
That is not to say that all buybacks are bad. Buybacks done at low enterprise multiples or below book value make a lot of sense and can go a long way toward boosting shareholder value over time. Buybacks done with free cash flow at reasonable prices are one of the investor's very best friends.
I ran a screen this morning looking for those companies that are buying back stock below book value and adding real value for their shareholders. Rather than relying just on buyback announcements, I searched for those companies that had actually lowered the number of share outstanding by at least 5% over the past year.
In spite of all the news and noise about buybacks this year, there are surprisingly few large-cap companies buying back stock at bargain prices. AIG (AIG) is the largest company buying back discounted shares as it repurchased 5% of the company below book value over the past year. Hess (HES) has been a big buyer as oil and gas prices have driven the stock price down as the company reduced its share count by about 12% over the past 52 weeks.
Voya Financial (VOYA) and CIT Group (CIT) are also large-cap companies that have reduced share counts by at least 5% priced below book value in the past year. It could just be my natural cynicism kicking in, but I find it mildly disturbing that while just four companies over $5 billion of market cap reduced their share count by 5%, 54 companies did so at prices well above the asset value of the corporation.
In the smaller-company world, there were some very interesting buybacks executed at bargain prices. While seismic data sales to the oil and gas industry are very weak and not expected to improve any time soon, Mitcham Industries (MIND) has been both buying back stock and reducing its share count. The total shares outstanding dropped just 12.1 million from 12.9 billion a year ago. During the same period, long-term debt has dropped to $10 million from $23 million a year ago. The short run for this company may be weak, but management appears to be putting itself and its shareholders in position to benefit when the oil and gas business recovers.
One of the more interesting below-book-share reduction companies is Forestar Group (FOR). The real estate company de-worsified into the oil and gas business a few years ago and has paid a terrible price for this mistake. Activist investors have gotten involved in the stock, and the CEO and CFO as well as several board members have been replaced as the company attempts to reverse its prospects. It owns a lot of land and has a strong real estate development business that builds planned communities and multifamily projects that the activist and I think are worth a great deal more than the current stock price.
Forestar is limiting capital expenditures in the oil and gas business to allow it to harvest the cash flow from existing wells and use it to support the real estate operations. The stock trades at just 73% of book value and the share count dropped about 10% over the past year. If it can eliminate the losses and write-downs from oil and gas, I think the stock could double or more from current levels.
I will resist the urge to get out my soapbox, but the biggest group of companies buying back stock below book value is small community banks. Twelve of the 50 companies that had large share count reductions below book value are little banks. The group remains the single most attractive of the stock market.
Buybacks done at bargain prices are fantastic for investors. Unfortunately, we do not see too many of those right now.