Buyback Wednesdays – Companies Repurchasing Shares Turn in a Dismal 2022

Welcome to edition 40 of Buyback Wednesdays, a weekly series that tracks the top stock buyback announcements during the prior week.

Considering we had very few buyback announcements last week, we decided to take a big picture look at the performance of companies buying back their stock. We decided to look at the biggest buyback announcements of 2022 and the biggest cannibals of the year to see how they performed. Often the two are not the same and the companies announcing the largest buybacks are not the ones buying back the most in the same year. In fact not a single company made it into both lists and each list had its unique set of companies.

The performance of both groups (announcers and actual buyers) was dismal for 2022 and they underperformed the S&P 500’s 20% drop in 2022 by a wide margin. We discuss each group in more detail below.

This article is a continuation of our November 30, 2022 article titled Buyback Wednesdays – Over $1 Trillion in Buybacks Announced This Year, where we looked at the number of announcements over the last few years, and the largest actual repurchases of 2022.

Buybacks have become the dominant form of returning cash to shareholders in recent years and so we decided to take a closer look at what the academic and industry research tells us about this capital allocation strategy. The research we have outlined below is a mixed bag and the last paper is particularly noteworthy given its criticism of share repurchases.

1. Move over Small Dogs Of The Dow, Here Come The Uber Cannibals

Authors: Mohnish Pabrai and Yingzhuo Zhao
Year Published: 2016

This article throws light on the companies that are “consistent cannibals”- those that are continuously gobbling up their own shares. It records all the uber cannibals since 1992 and their significant outperformance against S&P 500 Total Return Index. A detailed picture of two cannibals, the automotive retailer, Autozone (AZO) and the home builder, NVR, Inc. (NVR) is presented in terms of their buybacks and performance based on these buybacks. The money shot is the following paragraph from the article and explains some of the underperformance we are seeing in the 2022 data.

On average, the Ubers beat the S&P 500 by 6.3% annualized! If one had invested $100,000 in the Ubers in 1992 and rebalanced every year since 1992, it would have turned into $3.6 million, while an investment in the S&P 500 would have grown to (a still respectable) $904,314.

However, investing in the Ubers requires some fortitude. They underperform the S&P 500 in about half the quarters. In our backtests, they underperformed in 10 out of the last 25 years. One needs to “set it and forget it” with this strategy.

2. Why the CHIPS Are Down: Stock Buybacks and Subsidies in the U.S. Semiconductor Industry

Authors: William Lazonick and Matt Hopkins
Year Published: 2021

This paper discusses how semiconductor companies have used cash to buyback their own shares, thus leaving very little capital for growth. The five biggest repurchasers – Intel (INTC), International Business Machines Corporation (IBM), Qualcomm (QCOM), Texas Instruments (TXN) and Broadcom (AVGO), spent $249 billion in buybacks from 2011-2020. This is almost five times the subsidy semiconductor companies are expecting from the government in the next decade. The authors state,

“On June 8, 2021, the Senate approved $52 billion for the CHIPS for America Act, dedicated to supporting the U.S. semiconductor industry over the next decade. This paper highlights a curious paradox: Most of the SIA corporate members now lobbying for the CHIPS for America Act have squandered past support that the U.S. semiconductor industry has received from the U.S. government for decades by using their corporate cash to do buybacks to boost their own companies’ stock prices.”

3. Revisit Stock Buyback in the Perspective of the Theory of the Firm

Authors: Ping Ke, J.K.Yun
Year Published: 2017

This paper discusses the reasons for buybacks by various companies. Companies announce buybacks because they think their stock is undervalued, they want to signal the market, they want to improve metrics like earnings per share and want to distribute excess cash to shareholders in a tax efficient manner. It is fascinating to see the authors come to the conclusion that companies announcing buybacks see a short-term increase in their market value and higher institutional ownership. They state,

“We hypothesize that: 1) Firms that make repurchase announcement will witness an increase in market value during the short announcement window; 2) Firms that make repurchases are relatively undervalued compared to non-repurchasing firms in the same industry; 3) Proportion of ownership by institutional investors for stock repurchase firms is greater than that for non-repurchasing firms in the same industry. Our findings support the first and the third hypothesis. We do not find that firms that repurchase their own stocks are undervalued compared to the non-repurchasing firms.”

4. Buyback Derangement Syndrome

Authors: Clifford Asness, Todd Hazelkorn and Scott Richardson
Year Published: 2018

This paper wipes out certain myths about buybacks such as “companies that repurchase shares do so only to increase EPS and thereby price”, “The recent run-up in prices is the result of share repurchases, share repurchases have come at the expense of profitable investment” and so forth. This paper suggests that the announcement impact on returns of share repurchases is only between 1% and 2% on average. It states that share repurchase activity does not create EPS growth nor is the cause for recent stock market strength.

5. Harvard Business Review: Profits without Prosperity

Author: William Lazonick
Year Published: 2014

This paper discussed the negative side of buybacks and is in stark contrast to the rosy picture painted in the Pabrai article. The author states that allocation of profits to share buybacks leaves very little for the companies to invest in productive capabilities or higher income for employees. This is true in many cases where we have noticed that the firms use the cash generated to fund repurchases instead of using it for R&D or acquisitions.

While we have some sympathy for the author’s claims, his suggestion that buybacks should be entirely banned appears to be a little extreme. The 1% buyback tax that went into effect in 2023 appears to be headed in the direction the author would like the government to go and I certainly hope that this unnecessary tax does not increase in the future.

InsideArbitrage Data

2022 was a big year for buyback announcements and we saw over 1,000 buyback announcements from companies across sectors. The aggregate buyback amount across all these sectors crossed the $1 trillion mark as forecasted by analysts. We picked the top 10 most significant announcements of 2022 from our database and it consists of an eclectic mix of companies as outlined below.

Top 10 Buyback Announcements of 2022 Based on the Percentage of Market Cap

Among these companies, Kohl’s Corporation (KSS) has actually bought back nearly 18% of its shares over the last four quarters. KSS saw its stock price drop nearly 50% over the last year. Net income margin also dropped from around 5% to nearly 3% in 2022.

Lazydays Holdings, Inc. (LAZY), Foot Locker, Inc. (FL) and ODP Corporation (ODP) have also repurchased around 13%, 9% and 7.4% of their shares respectively in the same time frame. LAZY and FL showed similar trends of dropping stock prices and declining margins. ODP, on the other hand, saw a 13% rise in its stock price over 1 year period but saw its revenue decline.

On average, the performance of these top 10 companies was a negative 32%. Despite announcing significant buybacks in terms of their market caps, these companies underperformed the market with only one of the ten showing positive performance for the year.

Top 10 Actual Buybacks Over the Last Four Quarters

The top 10 cannibals didn’t perform any better with the group registering an average loss of 28.5%. IIIV and LOPE were the only companies that showed  positive performance with the latter showing a gain of 22%.

Just like insider purchases, it looks like a lot of companies are attempting to signal the market or are genuinely misguided in their assumption that their stock is undervalued. Looking at a longer period based on long established studies, both insiders and repurchasers outperform the market but it is essential to do your own due diligence. We look at both these strategies as idea generation mechanisms and not as the primary signal for addition to our portfolio.

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