When Great Share Buybacks Are Clouded By Awful Buybacks, Dividends Rule (XOM, IBM, PG, EMC, COP, HPQ, DTV, TRV, KO, MCD, MSFT, CSCO, WMT, LOW, HD, PFE, GS)

There are several ways in which companies can return money to shareholders, but the two most common methods of returning cash to shareholders are dividends and stock buybacks.  Dividends are rarely controversial unless they are robbing the coffers or are blocking growth opportunities.  Stock buybacks, on the other hand, are often controversial.  Many companies cannot prove at all that the repurchase of shares does a single thing for shareholders.  We have reviewed some of the greatest buybacks in recent years and are singling out some CEOs for their misguided steps here.

Standard & Poor’s has released some preliminary buyback data that it monitored during the first quarter of 2011 and some of these results are absolutely shocking.  We did not really use any of the S&P angling because we have been in the camp that buybacks do not alone act as the best “return of capital’ strategy.  The buybacks in the S&P 500 Index constituents rose by more than 62% to $89.8 billion in the first quarter of 2011 versus Q1-2010.  This was the seventh consecutive quarterly gain but that was only about 4% in sequential growth from Q4-2011.

What we are most concerned with it the companies wasting money to repurchase shares.  We have singled out some good instances of buybacks and some bad instances of buybacks going back to 2004.  The tally is massive and we compared the total dollars used the S&P singled out from Q4-2004 through Q1-2011 in share buybacks versus the market capitalization rates.  We also gave share prices today versus dividend-adjusted and split adjusted share prices as of December 1, 2004.  On that day, the adjusted price of the Dow Jones Industrial Average was at 10,783 at the 2004 date and sits at 12,259 today.

Some of the more successful stock prices with buybacks were Exxon Mobil Corporation (NYSE: XOM), International Business Machines (NYSE: IBM), Procter & Gamble (NYSE: PG), and EMC Corporation (NYSE: EMC).  ConocoPhillips (NYSE: COP).  A couple surprise winners were Hewlett-Packard Company (NYSE: HPQ), DIRECTV (NASDAQ: DTV), The Travelers Companies, Inc. (NYSE: TRV).  Another surprise winner was The Coca-Cola Company (NYSE: KO), even if shares are just now challenging prior decades highs.

McDonald’s Corporation (NYSE: MCD) was a clear winner because its shares were in decline before its big buybacks.  More importantly, Mickey-D’s committed to a strong dividend policy.

We have some that have been total duds and we wonder if shareholders should be able to hold the CEO and Chairman responsible for negligence.  Microsoft Corporation (NASDAQ: MSFT) is actually up since 2004, but it has spent a whopping $97+ billion buying back stock for what is less than a 10% gain.  Using one-third of the market’s current market capitalization rate has not been worth a 10% rise in shares.  One mutual fund holder told us in an interview that the company’s shares would rise substantially if Microsoft would commit to an extremely strong dividend plan for its future.

The absolute dud is Cisco Systems, Inc. (NASDAQ: CSCO).  Frankly, this has been such a poor example that it would be easy to that John Chambers should be administered a flogging.  Chambers just recently initiated a dividend, and it was extremely unimpressive.  The $50.7 billion spent since 2004 has been a total waste of shareholder capital.  The stock has lost more than 20% of its value, yet Chambers insists on wasting capital for buybacks.

EMC Corporation (NYSE: EMC) is the only one of these which does not pay a dividend, and part of its success has been because of the floatation of VMware Inc. (NYSE: VMW) and its subsequent success.  That and the company’s growth has been a better driver than the share buybacks.

Wal-Mart Stores, Inc. (NYSE: WMT) has shown a small share gain, and while we recently said it is buying back so much it might eventually go private, Wal-Mart has been dead money for so long that it might have been better off at least paying a higher dividend than it pays now.

Lowe’s Companies Inc. (NYSE: LOW) is down marginally while The Home Depot, Inc. (NYSE: HD) is up only marginally.  It is easy to argue as to why those are not up due to the depressed housing market, and maybe they are being opportunistic with their cash while shares are low and as there are few acquisition possibilities for either company.

Pfizer Inc. (NYSE: PFE) may be argued that this was a waste of capital with a miniscule stock performance, but we also have to remember the woes of 2003 to 2005 that Pfizer and Merck faced.  Goldman Sachs Group Inc. (NYSE: GS) is one which might look like a success, but all in all that has been a very mixed story considering the TARP bailout and the financial meltdown.

S&P noted that companies continue buying back stock to control employee options and to control shares used for dividend reinvestment programs. The counter-take is that S&P said, “Few companies are venturing outside of the box to purchase additional shares, as was the common practice in late 2005 through mid-2007.”

What we care about is that 354 S&P 500 companies have spent $333 billion on buybacks over the last year, but 219 companies spent more on stock buybacks than they did on dividends.  Some 57 companies bought shares but did not pay cash dividends. That is robbing shareholders.  The biggest sinning group is exactly the one you would expect: Information Technology with over 23% of all buybacks.

We have a table below that shows several key items.  S&P showed how much was spent in the first quarter and since the fourth quarter of 2004.  We then went in and looked at the current market capitalization of each stock.  We then went back to a December 1, 2004 share price and compared that price to today on each stock.  Be advised that the 2004 prices are supposed to reflects dividends, spin-offs, and splits.  The count on total share buybacks was calculated from the S&P team rather than an internal calculation.  Those dollar figures in buyback terms are in millions.

The table is below.

JON C. OGG