The Great Stock Buyback Conflation

Conflating Shareholders:

The stock buyback trend has been extremely hot in the last several years among major U.S. public companies.  Multi-billion-dollar buyback programs are announced by management and the market often reacts positively without any analytical scrutiny.  Buybacks are neither positive nor negative in a vacuum; the efficacy of the program is eventually borne out by whether the shares repurchased were attained well below their intrinsic business value.  If so, accolades to the management; and if not, tomatoes.

The bandwagon effect becomes far more dubious among large businesses when management conflates two species of stockholders, those Warren Buffett refers to as Continuing Shareholders and those he calls Departing Shareholders.  This distinction has little relevance most of the time; however, whenever a company announces a stock buyback program, the importance becomes paramount.  

The distinction is critical in evaluating the efficacy of a stock buyback program: the departing shareholders receive cash owned by continuing shareholders, and in exchange, the continuing shareholders receive stock (into the company treasury) from the dearly departed.  

When corporate management blithely refer to how many dollars were "returned to shareholders" during a given period, without mentioning that one shareholder group was divested of cash in the process of the other group receiving the expended cash, it challenges the limits of credulity. 

One Example pulled from a Crowded Sea:

Mondelez, International (MDLZ) makers of cookies, candy, crackers, and more than $6 billion in quarterly revenue announced Third Quarter 2018 results on 10/28/2018, via Form 8-K filed with the Securities and Exchange Commission. 

As quoted from MDLZ’s 8-K:

“The company returned approximately $800 million to shareholders in common stock repurchases and cash dividends. Year to date, the company has returned approximately $2.6 billion to shareholders.”

 Per the same 8-K, MDLZ’s Year-to-Date Statement of Cash Flows reveals that it paid $980 million in cash dividends through 9/30/2018.  Combining this fact with the quoted statement of MDLZ having “returned approximately $2.6 billion to shareholders” year-to-date, MDLZ is counting approximately $1.6 billion – or 62% of the reported total return to shareholders – from its buyback program. 

An alternative MDLZ presentation could have been forthright and accurate in stating that "year-to-date owners' cash has been expended in the amount of approximately $1.6 billion to departing shareholders.  Continuing shareholders will benefit from the reduced number of shares now outstanding."  But MDLZ was not forthright; it obfuscated the fact that some shareholders gave up ownership of the very cash touted to have gone into the pockets of other shareholders.

The Issue for Shareholders:

The issue for continuing stockholders is to compel an answer from the management as to the question: “who owned the cash used to buy back the stock”? 

Stockholders, the owners of all net assets of the corporation, of course, owned the cash expended by the agent-managers to buy-in common stock from departing shareholders.  Following the so-called "return to shareholders", the continuing shareholders now own less cash; and at Mondelez its $1.6 billion less cash owned, just in 2018 alone.

To be absolutely accurate, in the most pedantic sense, cash was given to some shareholders.   But if the cash was taken out of some shareholders’ pockets to be put into other shareholders’ pockets, what value did the management provide in this cash-changing-hands exercise among shareholders?  And this question leads back to the much longer-range assessment of whether management provided any action of value.  If the management's decisions were valuable, it was not in the expending of owners' cash to departing shareholders; it will be borne out in the value of the shares having been taken out of circulation.  

To be fair, the conflation of shareholders in discussing stock buybacks is so rampant in the U.S. that Mondelez International was chosen virtually at random.  It carries no more fault than dozens, if not scores of other companies.  Nonetheless, because Mondelez did knowingly or incompetently conflate two groups of shareholders while discussing stock buybacks in its 3Q 2018 earnings announcement, it published material that was financially indefensible.  

DISCLOSURE:  The author has no financial interest, long or short, in any company discussed in this article.