Buyback failures since January 1, 2021
A sad parade of dashed hopes
The recent decline in commodity prices has put pressure on many energy names. Among those names are a few companies that decided their shares were “undervalued” and spent a lot of money to buy back shares hoping to improve their share prices, sometimes just to make management share options more valuable, sometimes from a genuine belief this was a good use of funds.
Some saw benefits.
WCP, ARX, PXE and CPG realized some benefit with shares today trading at a modest premium to the price paid in the share repurchases (although the price rises cannot be attributed solely to buybacks).
Some were less satisfactory.
MEG spent $440 million to buy back shares at an average price of CDN$23.15 (adjusted for shares issued under share based compensation) and MEG stock today trades at CDN$23.66
NVA spent $157 million to buy back shares at an average price of CDN$11.67 per share and the shares haven’t budged, trading today at CDN$11.11.
CJ spent $49 million to buy back shares (including shares repurchased to offset share based compensation) and the share count kept rising and the shares now trade at CDN$6.22. It is hard to see a benefit from the buybacks.
BTE spent $159 million to buy back shares at an average price of CDN$6.54 and the shares now trade at CDN$4.38.
Oil prices were relatively firm from January 1, 2021 to the present, but have fallen off with WTI now in the range of ~US$70, still profitable enough but not quite as profitable as the peak of US$120 not that long ago. The high price made CEO’s giddy and they drank the buyback Kool Aid.
The money spent on buybacks - about CDN$7 billion across the names I follow - wasn’t wasted. The respective boards chose between paying dividends and repurchase of shares and in many cases were encouraged by shareholders and fund managers to repurchase stock. The result - those who sold their shares into the repurchase program got the cash and those who remained invested saw the trading value of their holdings decline. Had the money been paid out in dividends, the shares would likely trade below today’s trading price since the number of shares would have been higher, but investors would have not only the shares but also the cash from the dividends.
The value of the company’s would be the same under both regimes with the same amount of cash leaving the treasury, but the share prices would reflect differing numbers of shares outstanding and the buyback crowd would enjoy higher trading prices than those who received the dividends, but at the cost of missing out on the dividends. The issue of whether dividend policy affects value of a company was studied in the 1950’s and in 1960 Merton Miller and Franco Modigliani won a Nobel prize for their “irrelevance theory” which demonstrated that dividends are a financing decision and cannot create incremental value of the firm, although more recent studies dispute this finding. The more recent work advances the case that company’s that pay predictable and rising dividends over time benefit from a higher price to earnings multiple than their peers who do not. I argue that is not a benefit at all, since it results in reinvestment at lower returns (same earnings, higher share price) than if the multiples remained constant regardless of dividend policy - which was the Miller-Modigliani reasoning.
Readers interested in this debate might enjoy reading a November 2022 paper entitled “Dividend Policy: A Review of Theories and Empirical Evidence”.1 The author concludes the issue is fuzzy and indeterminate quoting the late Fisher Black about dividend policy: "the harder we look at the dividends picture, the more it seems like a puzzle, with pieces that just do not fit together" (Black, 1976, p.5).
Author, DeVita Tri, American Economic Journal Policy, November 2022.
I was in error and corrected it.
Interesting discussion @Michael Blair I want to like buybacks, I really do and then grinches like you come along and burst the bubble the of sweet blather that managment puts out. 🤣The logic is fairly simple, smaller float equals more rewards-dividends for those who stick around to the end. I've never seen a cause and effect on that theory though. U.S. shale cos have been buying back their stock like mad under that premise, and I imagine every share reduction made in the last couple of years is underwater. Devon Energy has spent billions buying back stock, yet I know it's barely kept pace with all the acquisitions that have been paid for in stock, and my dividend for Q-4 will be smaller than Q-3 due to shrinking cash flow. It makes the head hurt. I think going forward, I am a simple man. Give me my damn dividend and let that be the end of it. Cheers and thanks as always for interesting content.