The Stock Buyback Scam

One of the great lessons future business leaders learn in business school is that stock buybacks are great. It is hammered into their skulls in class after class. It's tax efficient! It counteracts dilution! Blah blah blah. I propose that, on the contrary, stock buybacks are terrible for long term stockholders because they temporarily prop up the price of the stock so that insiders can sell at more favorable prices. Furthermore, companies tend to buy more stock in good times, thus paying a premium for their own shares. In fact, companies are locking in enormous losses in their stock trading. Washington Mutual just issued 176 million shares of stock at $8.75. In 2006 and 2007 WM purchased approximately 150 million shares of its own stock at an average price of $43.48. The company just punted $5.2 billion dollars trading its own stock. Wachovia's 10K shows it spent approximately $8.4 billion purchasing its own stock in the past three years for about 150 million shares. A bit of simple math shows that Wachovia paid around $52 on its own stock. Today it announced it was issuing shares at $24 for a loss of $4.2 billion. Let's see, buy at $52, sell at $24. Even my nine month old baby knows that's a bad trade, and she tries to eat her socks.

The stock market is littered with companies that are being forced to issue shares at enormous discounts to where they purchased shares a year ago. In Barron's this weekend, there was a small blurb that noted the $589 billion in buybacks companies engaged in last year. Furthermore, S&P was quoted as saying that buybacks would continue to be strong in 2008. I beg to differ. Take the stock issuance frenzy in financials, add one part freeze in current buyback programs, add another part major problems raising capital due to credit market fiasco and what do you get? I'm certain you don't get strong buybacks in 2008. In fact, I would have to ask if the guys at S&P are smoking crack! Even Whitney Houston can tell you that S&P is dead wrong, and she's the most public crack smoker I know, although I hear, she's finally laid down the pipe. I predict that 2008 will be the year of the backlash against stock buybacks.