Practical analysis for investment professionals
30 May 2014

Weekend Reads for Investors: Repo Mania

Posted In: Weekend Reads

It’s perhaps not surprising that US corporations have taken advantage of historically low interest rates by issuing record amounts of debt. It’s revealing, however, that companies are using the proceeds to buy back their shares with stock prices at all-time highs. According to S&P Capital IQ, US firms are repurchasing their shares at a pace not seen since 2007. Together with the recent surge in M&A activity, this suggests that companies’ organic growth opportunities are scant. Goosing earnings per share via acts of financial engineering (like debt-financed share buybacks) is not a viable long-term strategy. In Berkshire Hathaway’s 2011 shareholder letter, Warren Buffett wrote:

It doesn’t suffice to say that repurchases are being made to offset the dilution from stock issuances or simply because a company has excess cash. Continuing shareholders are hurt unless shares are purchased below intrinsic value. The first law of capital allocation — whether the money is slated for acquisitions or share repurchases — is that what is smart at one price is dumb at another.

With valuations looking increasingly stretched, we suspect companies will have to demonstrate real growth for stocks to move measurably higher. A shift in priorities also seems in order. In “The Price of Wall Street’s Power,” Gautam Mukunda argues that prudent decision making by company management is too often undermined by Wall Street’s “outsize influence” and obsession with meeting short-term financial targets. What’s the remedy? In “Curbing Short-Termism in Corporate America: Focus on Executive Compensation,” Robert Pozen calls for longer time horizons in management incentive packages and an end to quarterly earnings projections.

Below are some other stories and videos that caught my eye in recent weeks.

Strategic Thinking

Buffett and Big Blue

Behavioral Issues

Corporate Disclosure

Big Tobacco

The Lighter Side

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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About the Author(s)
David Larrabee, CFA

David Larrabee, CFA, was director of member and corporate products at CFA Institute and served as the subject matter expert in portfolio management and equity investments. Previously, he spent two decades in the asset management industry as a portfolio manager and analyst. He holds a BA in economics from Colgate University and an MBA in finance from Fordham University. Topical Expertise: Equity Investments · Portfolio Management

1 thought on “Weekend Reads for Investors: Repo Mania”

  1. JOHN KILLEEN says:

    The buyback foolishness has been occurring in big volumes for 20 years. As good as IBM has performed for example, look how much shareholder cash they have wasted on restructuring their balance sheet. That is what firms are doing, right? IBM consistently bought as it’s shares ascended and typically shortly after purchases subsided, shares dipped. In theory, mass media says the repos are a “return of capital” . What about the share price drop that happens? Is that a return of capital or vaporizing of capital?
    This is reorganizing the deck chairs of the Titanic

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