I tell this story because I have always been wary of common
stock buy-back plans. Not because they
are all bad. Many companies have a
disciplined approach of returning capital through this process rather than
paying dividends. However, when the
buy-backs are not backed up by fundamental growth in the company, they turn
into little more than the company entering the debt market to finance
dividends, or worse, robbing from needed capital investment to maintain future
cash flow.
Thursday, June 5, 2014
Watch Out for the Stock Buy-Back Taper
Back in the year 2000 I got a call from a broker wanting me
to take a look at particular large cap financial stock. The pitch was “the company has lagged its
peer group, but it has announced a major share re-purchase program.” I asked what the company plans were for
growth. Awkward silence was evident on
the other end of the line. I then said, “So
you are asking me to buy-out certain shareholders who don’t want to own the
company anymore because the management team is struggling to find ways to
invest?” Needless to say, I did not
invest in the company. But I did follow
it. Sure enough it did rise in the
following months, only to be cut in half within the next 2 years.
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