An angry vote against share buybacks
This Canadian investor has had it with share buybacks, which are better for management than shareholders, he says, citing five cases.
Sometimes people just have to speak up.
As one investor puts it: “Occasionally a bad management practice becomes so widespread that I feel compelled to speak out against it.”
The practice in question is the repurchasing of shares by publicly traded companies. Share buybacks is the most common term used.
“Normal course issuer bids” is the more formal term that companies use in their press releases.
Mr. T.E. Gardiner doesn’t like it under any name. Retired from Bell Canada, he lives and invests in Ottawa. And he writes regularly for Investor's Digest of Canada.
His seeks to articulate the concerns of individual Canadian investors — and he doesn’t think investors are getting a fair shake with share buybacks. Indeed, he sees it as one way in which management can over-reward itself even if it under-performs.
He dissects the share buyback policies of several well-known Canadian stocks. All are solid companies and clearly rate a buy recommendation from most analysts.
But why can’t they just leave those shares on the market?
Simply nonsense
Share buybacks are supposed to be good for shareholders. By reducing the number of shares on the market, they increase earnings per share for the rest.
They are also alleged to demonstrate management’s commitment to the company by its willingness to invest in the shares. And share buybacks support and bring stability to the share price.
So what’s not to like? Mr. Gardiner will buy the last point. Buybacks give the share price stability.
But the first two points are “simply nonsense,” he says. “The money spent to buy back the shares could have just as easily been given to the existing shareholders in the form of an extra dividend.”
Better yet, it could have been re-invested in profitable business opportunities to promote future earnings.
“What a share buyback really demonstrates is that management can’t see any good investment opportunities and can’t think of anything else to do with the shareholders’ money,” is this investor’s harsh judgment.
Buy high, sell low?
If management truly believes the shares are undervalued, a buyback might make sense, Mr. Gardiner concedes. But when the market hit bottom over a year ago, few companies bought back shares at discount prices.
In fact, many suspended their plans in order to conserve cash, showing no confidence in the future whatsoever.
And now that shares have recovered somewhat, the plans are coming back out. From 2006 to 2009, Royal Bank of Canada (TSX-RY) had a buyback plan that saw it buy as many as 12 million shares in 2007 and a million more in 2008. In 2009 it bought back none. In 2010, the share buyback plan reappeared.
Bank of Nova Scotia (TSX-BNS) had almost exactly the same story. 12 million shares bought back in 2007, 875,000 in 2008, none in 2009.
Canadian Pacific Railway (TSX-CP) went even further. From March 28, 2007 to March 27, 2008 it bought back 2.7 million shares at an average price of $70.64. In 2009, seeking new capital, it turned around and issued 13.9 million new shares at an average price of $36.75. Is this a new management policy, asks Mr. Gardiner acidly — “buy high, sell low?”
Not doing a good job
These are just three examples that stand out. They are not alone. CP’s other half, Canadian National Railway (TSX-CNR), does the same thing.
Even companies in Mr. Gardiner’s favourite category of stocks, utilities, use share buybacks. Canadian Utilities Ltd. (TSX-CU) had a plan in place from May 2008 to May 2009, but didn’t use it. Now it’s back.
Share buybacks really do three things, says this investor. They sop up the extra shares floating around from executive stock option plans. They prop up share prices to ensure that stock options are worth more. And they ensure that executive compensation, which is at least partly tied to the share price, “continues to be excessive.”
Mr. Gardiner does not go easy on executive compensation. If stock option plans result in too many shares floating around, the solution is simple, he says. Eliminate the plans.
And at any rate, if the market can’t keep the share prices high enough on its own, “then management isn’t doing a good enough job,” he adds.
If options are a reward for executive performance, then artificially propping up the share price to support them defeats the whole purpose.
Fire them
You can count Mr. Gardiner among those who think executive compensation has gotten out of hand. He agrees that those who run a company should make a good deal more than the average worker.
But the spread between employer and employee incomes has multiplied dramatically. Whereas it was once 10 to 20 times as much, now it is 100 or in some cases, even 1,000 times as much.
Much of this difference gets down to extra compensation such as stock options and bonuses. The job should be challenging enough that a big salary is sufficient incentive, says this investor.
“Pay them enough to attract good talent and let them do the job. If they screw up, fire them.”
From this uncompromising statement, Mr. Gardiner concludes by admitting that there is certainly nothing illegal or furtive about share buybacks. And there is little investors can do about them.
He does encourage shareholders to complain at the annual meeting. But in the end, he tells his readers in Investor's Digest of Canada, all you can do is vote with your feet.
When management believes “the best use of funds is to shrink the company,” find someone that puts the shareholders’ money to more profitable use.
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