DO SHARE BUYBACKS “RETURN CASH TO SHAREHOLDERS”?
Note to corporate management: Please “return cash to shareholders “ via dividends, not company share repurchases. I will be happy to pay the taxes and buy more shares on my own. Dunkin’ Donuts comes to mind because of their most recent earnings report. Optimistic observers relative to DNKN refer to the $1.1 Billion of stock bought back by Company from mid-2011 to mid-2015 since they have been public, “RETURNED TO SHAREHOLDERS”. Don’t mean to isolate DUNK, because this is a common corporate strategy by corporate executives. Problem is that the shares outstanding don’t contract, improving EPS and EBITDA/share nearly as much as they should. The shares bought back are offset, at least in part, by new stock options issued to executives. Some situations are worse than others. In the case of DUNK, $1.1 billion was bought back, at an average price over the four years of perhaps $37.50/share. This should have reduced the capitalization by about 30 million shares. Unfortunately the shares outstanding only came down by about 11 million shares. These numbers are approximate, but it looks like about 19 million new shares were created by way of stock options, or acquisitions if there were any (not in the case of DUNK). So 19 million shares multiplied by the current market price of about $42/share, equaling a robust $798 million was returned to executives, not shareholders. Bottom line: before you buy a stock because the company is buying back stock, check to see how much the number of shares outstanding is really being reduced. Dividends are a far more direct, effective, and transparent way of returning cash to the real partners, in terms of capital contributed to the business, the shareholders.