Best Buy Co. has been giving share buybacks a bad name. The consumer electronics retailer announced on Tuesday that it would suspend all buybacks through the end of 2012, interrupting what had been a $5-billion (U.S.) share repurchase plan announced last year.
Investors tend to like share buyback plans because they reduce the number of outstanding shares, driving up earnings on a per-share basis. They also see buybacks as a signal from management that it believes its own shares are undervalued.
The problem with Best Buy is that it has demonstrated atrocious market timing – purchasing its shares at relatively high prices and only suspending the plan after the share price slumped 27 per cent this year, hitting a nine-year low.
In other words, the management wizards at the company bought high and suspended low. And according to Bespoke Investment Group, Best Buy has made this into a habit over the past couple of years.
Bespoke went back to the start of 2010, looking at the quarters when Best Buy repurchased its shares. Since then, the retailer has spent a total $2.9-billion – or about half of its current market capitalization – buying back its own shares on the open market, at an average price of nearly $30 a share.
On Tuesday in late-morning trading, the shares were down to about $17, or more than 40 per cent below the average buyback price.
One conclusion here is that Best Buy might be a negative indicator. If buybacks coincided with a sinking share price, then the suspension of buybacks might be a sign that the share price is ready to rebound.
What’s more likely, though, is that Best Buy is not unusual: Companies in general make terrible decisions on when to buy their own shares.
According to FactSet Research Systems, buyback activity does not predict share price performance – or at least not in a good way. They looked at companies that have done the most aggressive buybacks relative to their market capitalizations. Since 2005, the cumulative market-cap-weighted returns for this group has been -14.7 per cent.
Perhaps companies are getting the point, because buyback activity has been heading down in recent quarters. In the first quarter of 2012, the dollar-value of buybacks fell 4 per cent from the first quarter of 2011 and marked the second straight quarterly decline.