Share buybacks and stock compensation, the bad and the ugly

Share buybacks are good right? The company uses their free cash to buyback shares which reduces the number of remaining shares such that each share has a higher claim over future profits which adds to their value.

Further they’re tax efficient in that paying dividends results in dividend tax.

BUT;

• Firstly, in cyclical stocks you need to be buying back at lows, not highs and the companies usually have no free cash at lows, so either they don’t buy back or they do so at highs when they have the cash. Horrid value destruction.
• Secondly, some companies are buying back but also issuing new shares to staff, at times at a rate faster or similar to what they’re buying back. This is then effectively an underhand salary to staff. This is especially an issue with large tech stocks, see examples below.
• Thirdly, new share issues are considered non-cash, but ultimately they are cash as you gave somebody real shares that have future claim on profits.
• Fourthly, often acquisitiosn are done with stock increasing the outstanding shares. Many will see this as a free deal as shares don’t cost. But they do cost as they reduce every other shares value and if the company has been buybacks, well then they paid cash for those shares, just indirectly.

Locally we do see buybacks, but share issues are relatively small so the impact is less shares and more value per share.

Using IFRS accounting diluted HEPS uses the share count of all outstanding shares PLUS all promised shares not yet delivered. These are basically options that could become shares and gives a way better reflection of the profit, even thugh not yet issued they will potentially come to makret and be issued.

Apple (Nasdaq code: AAPL) has been buying back shares and as such over the last decade it’s outstanding shares is down about 38%.

Apple shares outstanding

Meta (Nasdaq code: META) has also been buying back, but they also issue shares at such a pace that over the last decade shares outstanding is basically flat.

Meta shares outstanding

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Simon Shares

• US October CPI was 3.2%, down from 3.7% in September (after peaking at 9.1% in June 2022) and markets absolutely loved the data. Expectations for Fed rates is now no more raising and cuts starting maybe as soon as the 19-20 March or 30 April – 1 May meeting.
• Shoprite* (JSE code: SHP) trading update shows they still knocking it out of the park and taking market share.
• Woolies* (JSE code: WHL) trading update had more excuses tha a five-year old caught eating all the picnic ice cream.
• Decent Stor-Age* (JSE code: SSS) results with ±10% yield and discount to NAV of ±25%. The yield is nice, but you can get the same in cash right now. But when rates start coming down the yield is more impressive and lower rates could see higher valuations.
• A global luxury ETF

Simon Brown

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