Saturday, August 30, 2008

Stock Buybacks

From today's WSJ:

Repurchases Routinely Give Shares a Lift, But the Effect Could Be Ephemeral
August 30, 2008

Buying high and selling low: That sounds dumb. But call it a "share repurchase program" (or stock buyback), and people get excited.

Mistimed buybacks can be deadly. In 2006 and 2007, Washington Mutual spent $6.5 billion on buybacks. In January 2007, with the stock at 43.73 per share, chief executive Kerry Killinger called the repurchase program "a superior use of capital." Also in 2006 and 2007, Wachovia sank $5.7 billion into buybacks at an average price of more than 54. Citigroup spent $8.3 billion to repurchase stock in 2006 and 2007 at share prices of about 50. In April 2008, all three banks were so capital-starved that they had to raise cash by selling shares for a fraction of what they had recently paid for them -- WaMu at 8.75, Wachovia at 24, Citi at 25.27 a share.

This is new news? You had the story here when it meant something!

Now that the 52 week low list is decorated with Investment banks, regional banks, and the money center banks, I suppose someone would ask the question: Why are banks raising capital, at these prices, at such dilution to shareholders instead of when the prices of the stocks were much higher? Well the answer is simple.

1) They now have too raise capital.
2) The banks were too busy buying back stock at the highs!

Let's go from the largest to the least:

Six weeks ago, Citibank raised $4.5 billion selling 178 million shares at 25.27. Now yesterday, they saw something in the tea leaves that was different from the end of April. More and larger writedowns. Lehman just raised capital a couple weeks ago. How long before they see more problems? Well you now have their script!

But let's look at how Citigroup spent their money buying back stock:

In Q1 of 2006, they bought back 52 million shares at 46;
in Q2 they bought back 44 million shares at 49;
in Q3 they bought back 42 million shares at 49;
in Q4 they bought back 32 million shares at 52;
and in Q1 2007 they bought back 20 million shares at 54.

But you can pick on any of these companies. Go further back. In the last six years before this year Citigroup bought back $32 billion of stock.

WaMu bought back $12.4 billion
Wachovia bought back $15 billion.

How about the Investment Banks?

Lehman bought back $14.7 billion.
Morgan Stanley bought back $15 billion.
Merrill Lynch bought back $21 billion.

Now these same companies bought back $14 billion of stock in the first 150 days of 2007, and they bought back less than $700 million in the first 150 days of 2008.

That's $93,333,333 a day in 2007.
That's $4,666,666 a day in 2008 or $777,777.77 an hour on Wall Street time.

You could argue that the banks were just dumb in 2007, and lucky in 2008!

Buy low and sell high? Not in a stock buyback!

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