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Share buybacks – the big scam?

As a result of the financial crisis in 2009, interest rates began to pull back. To date, money has never been cheaper. Many companies such as 3M or McDonald’s use the low interest rates for borrowing to buy back their own shares on an unprecedented scale. Share buybacks are actually intended as a boon for shareholders, because with fewer shares in circulation, every remaining share gets a larger share of profit and dividends. However, massive share buybacks falsify key indicators such as earnings per share. Many shareholders are in the dark as to whether the increase in earnings per share is based on real earnings growth or just on share buybacks. The resulting uncertainty manifests itself in articles and videos in which the share buybacks of individual companies are sometimes denounced. This is of little help for a serious fundamental analysis.

The stock finder now has the solution ready. In a fully updated chart, you can now see the share of share buybacks in the earnings increase per share. At a glance it becomes clear what role share buybacks play in a company. So McDonald’s repurchased so many shares in 2016 that earnings per share rose by 48 cents just for that reason alone. The 64 cents increase in earnings per share was largely due to share buybacks!

McDonald’s share buybacks and impact on earnings per share

McDonald’s share buybacks and impact on earnings per share

The stock finder is doing pioneering work here too, because, as far as I know, this essential information has so far not shown a research tool, however expensive.

Further examples of massive share buybacks and their effects can be found in popular dividend stocks such as 3M. In 2018, 3M was able to increase the earnings per share adjusted for the US tax reform only by modest 9 US cents per share thanks to share buybacks. Without share buybacks, 3M should have announced a $ 7 drop in earnings per share. In 2015, the increase in earnings per share was also exclusively due to share buybacks:

3M was only able to increase earnings per share in 2015 and 2018 thanks to share buybacks

3M was only able to increase earnings per share in 2015 and 2018 thanks to share buybacks

But also with high flyers like Apple Share buybacks play a major role in glossing over key figures per share. Since 2014, the increase in earnings per share has been largely attributable to share buybacks:

Share buybacks also play a key role in helping Apple to bolster earnings growth

Share buybacks also play a key role in helping Apple to bolster earnings growth

Dividends are out – share buybacks are in

In the early 1980s, share buybacks were not an issue in the United States. US companies shared their profits almost exclusively through dividends. This changed significantly in the United States from 1982 onwards when share buybacks on the stock exchange were permitted.

Examining Share Repurchasing and the S&P Buyback Indices in the U.S. Market (source https://us.spindices.com/indices/equity/sp-500)

Examining Share Repurchasing and the S&P Buyback Indices in the U.S. Market (source https://us.spindices.com/indices/equity/sp-500)

As early as 1985, shares were bought back in the amount of more than half of the dividends distributed. However, it should take until 1997 for the volume of share buybacks to exceed the volume of dividends distributed. In 2018, the volume of share buybacks exceeded that of dividends by over 50 percent! Today, US companies primarily share (or even incur debt) in, company profits through share buybacks. Dividends only play the second fiddle. In line with this statement, 43 percent of US companies paid dividends in 2018, but 53 percent of companies bought back their own shares.

Share buybacks and dividends are not an either or. As you saw from the introductory examples from McDonald’s, 3M and Apple, many dividend payers buy back their own shares in parallel. The importance of share buybacks is also increasing outside of the USA in Europe and Asia.

Percentage of Firms with positive buybacks (Source https://us.spindices.com/indices/equity/sp-500)

Percentage of Firms with positive buybacks (Source https://us.spindices.com/indices/equity/sp-500)

Many shareholders and especially fans of a dividend strategy is not aware of the importance of share buybacks or their impact on their investments.

When the balance sheet overflows with own shares

In the case of share buybacks, the shares can either be canceled (i.e. canceled) for all times or accounted for in order to be able to issue the shares again later. If the shares are accounted for, they accumulate on the balance sheet. Over the years, the sum of some companies has grown to an impressive size. In extreme cases, the balance sheet value of the repurchased treasury shares even exceeds the balance sheet value of the company many times over. This is the case with Texas Instruments, for example, where the company has assets of $ 17.3 billion (goodwill + cash + securities + core assets). At $ 34.5 billion, the shares bought back (treasury stocks) almost double the company’s value! The stock finder graphically presents this surprising constellation:

Key Texas Instruments assets, including share buybacks

Key Texas Instruments assets, including share buybacks

Companies with the most own shares

As a treat here are the 30 companies with the most own shares on the balance sheet. The column “Cf. to balance sheet total ”indicates the relation between the balance sheet total and the balance sheet item“ treasury stock ”. 100 percent means that both sizes are identical. The leader is the Waters Corporation, whose balance sheet item “Treasury shares” corresponds to a proud 330 percent of the total assets. This position “treasury shares” can be larger than the total balance sheet total because it is negative and thus reduces the balance sheet total. Well-known names such as Illinois Tool Works, McDonald’s or Procter & Gamble are also included in the list.

Isin Surname country Total assets [Mrd. €] Own shares position [Mrd. €] See total assets dividend
US9418481035 Waters Corporation United States 2,667 8,789 330%
US1773761002 Citrix Systems Inc United States 4,331 11.132 257% 1.0%
US8825081040 Texas Instruments Inc United States 17,283 36.002 208% 2.7%
US62944T1051 NVR Inc United States 3,888 7,813 201%
US2786421030 Ebay Inc United States 18.929 34,946 185% 1.3%
US5926881054 Mettler Toledo United States 2,886 4,730 164%
US5261071071 Lennox International United States 2,128 3,412 160% 1.4%
US4612021034 Intuit Inc United States 7,764 11.929 154% 0.7%
IL0010824113 Check Point Software Tech Israel 5,621 8,410 150%
US45168D1046 IDEXX Laboratories United States 1,886 2,788 148%
US1941621039 Colgate-Palmolive United States 15.070 22.104 147% 2.4%
US4523081093 Illinois Tool Works United States 14.149 19.680 139% 2.4%
US0758961009 Bed Bath & Beyond Inc United States 7,791 10.716 138% 8.4%
US09857L1089 Booking Holdings United States 17,862 24.115 135%
US5801351017 MC Donalds United States 50,568 67.134 133% 2.5%
US78409V1044 S&P Global United States 10,463 13.329 127% 0.8%
US61174X1090 Monster Beverage Corp. United States 4,881 5,799 119%
US4370761029 Home Depot Inc United States 58.737 65,793 112% 2.3%
US4592001014 IBM Corp. United States 153.403 169,437 110% 5.0%
US0382221051 Applied Materials Inc United States 21.815 23,995 110% 1.5%
US57636Q1040 Mastercard United States 30,648 33.531 109% 0.5%
US3848021040 W.W. Grainger United States 7,177 7,720 108% 1.8%
US55354G1004 MSCI Inc United States 3,912 3,939 101% 0.9%
US5128071082 Lam Research Corp. United States 12,939 12,919 100% 1.6%
US7739031091 Rockwell Automation United States 6,666 6.522 98% 1.8%
US7181721090 Philip Morris International United States 37,494 35.146 94% 6.3%
US7427181091 Procter & Gamble United States 118.560 105,823 89% 2.6%
US6153691059 Moody’s United States 11.306 9.524 84% 0.8%
US7512121010 Ralph Lauren United States 7,280 5,778 79% 3.3%
US67018T1051 Nu Skin Enterprises United States 1,746 1,384 79% 3.8%

It is also interesting to note that most of these companies also distribute a dividend, some of which is stately.

Are share buybacks bad?

Anyone who acts on the stock exchange according to the motto “only cash is true” and distrusts long-term price gains will be suspicious of the loss of meaning of the dividend. Suspicion is heightened when it is reported that companies are financing share buybacks through new debt

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