Bad Buybacks

I was working on my regular Bloomberg column, taking a closer look at some companies in the news (here and here) — GE, GM, Apple, etc. — firms not coincidentally doing big buybacks. In the process of trying to put together an objective, data-driven, dispassionate discussion, I found myself continually getting first annoyed, then angry.

Why? Because these are modern examples of some of the very worst stock buybacks, apparently because mediocre management cannot think of anything better to do with the capital.  This annoyed me so much that it kept derailing my (objective, data-driven) research, making my attempts at creating an even-handed analysis on the pros and cons of buybacks.

My solution in keeping that column from becoming the blog version of road rage was to move those frustrations here. Thus, that column will remain objective and analytical, while this post will be none of those things.

Let’s start by cherry-picking a few specific anecdotes of companies in the news lately.1 Not coincidentally, all of them — General Electric,General Motors, and Apple — have all been buying back stock.  Note these are some of the biggest, best known and most widely held public companies in the world.

From 2015-18, General Electric has made very ill-timed share repurchases — over $50 billion worth at much higher prices than today. The stock, at $7 and change, is back to where it was in 1993. At the same time, Management has been well compensated, including the ~billion dollars Jack Welch pulled from the company, mostly via stock options, while leaving behind the ticking time bombs of GE Capital and GE Insurance. You can run screens all you want, but GE’s buybacks fucked investors while enriching insiders. EOM.

Next up in our pantheon of future HBS case studies: General Motors. The General bought $14 billion worth of stock back from 2015-17 – and at considerably higher prices – only now to reverse course, slimming down to “remain competitive.” (GM spent billions buying stock in years prior, too).

Over that same time period, Tesla’s model 3 was released, becoming not only the best selling electric in the USA, but one of the best selling sedans, too. Porsche/VW/Audi rolled out several new e cars (Taycan and Audi e-Tron) that achieve 80% full charge in 20 minutes. The Jaguar I-Pace electric SUV won all sorts of Car of Year the awards (see, this, this, this and this). One cannot avoid the conclusion that the company would have been much better off using that capital for something other than buybacks — like R&D.2

But sure, go ahead and make the argument that General Motors’s share buybacks were the best use of $14-fucking-billion dollars in capital . . . I’ll wait . . .

While GM was spending billions on buybacks, its competition was spending billions innovating: building out a nationwide electric charging station infrastructure, developing autonomous driving technologies, creating the latest generation battery technologies. GM has fallen behind its competition in technological innovation.

Is this really a firm that should be spending billions buying back its own stock? This is not merely bad governance and misuse of capital — IT IS CORPORATE SUICIDE.

What about Apple? The technology juggernaut that has almost $250 billion dollars in cash on hand, surely they can afford those buybacks. In the first half this year, Apple bought back over $43 billion dollars of stock. They announced $100 billion dollars in 2018 buybacks.

I would have much preferred to see the company purchase Netflix or buy Disney with a combination of cash and stock.

The company does spend billions on R&D, but from my vantage point, they have little to show for it. Maybe its not be enough. As a Mac fanboy going back to 1988, I cannot figure out what the company IS spending its R&D dollars on, other than semi-conductors and faster chipsets. But there are MANY pressing demands that are not being addressed. The firm’s proprietary apps and software have become a confusing mess, from iTunes to iPhoto. Apple was an early leader in voice technologies, but Siri is an utter disaster, and was quickly bypassed by both Amazon’s Echo, with Google’s Assistant. If that is going to be the next great platform, then you you should not let your innovative lead go to hell. Don’t blame the wireless networks for these failures, either. For what Apple spent on buybacks, they could build the fastest most reliable mobile voice and data network, and OWN that space.

I find Apple’s software is quirky and inconsistent at best; at the very least, it no longer delights me each time I use it. Perhaps that is why bloatware kludge manufacturer Microsoft has recently caught up to Apple for the market cap crown.

Given that massive buyback, you might imagine Apple has released lots of innovative new technologies – but you would be wrong. Other than AirBuds, it is hard to find much “insanely great” innovation from Apple. Maybe now that we are up to the FOURTH generation Apple Watch, its almost ready for primetime.

Does the company plan on living off of Steve Jobs’ creation of the iPhone for the rest of eternity?

Speaking of which: my very expensive iPhone X is essentially a glass brick as a phone. Most incoming calls are spammers and scammers. Lot of people simply do not answer their phones anymore; I carry the damn thing around primarily for Google Maps, Twitter and Uber. But phone calls? Not so much.

One might surmise that a company who lives and dies on mobile phone sales might want to address this issue. A recent study found that by 2019, half of cellphone calls will be scams. Given the significance of the iPhone to the company – more than half of Apple’s revenues comes from iPhone sales 3 – why not spend some of their capital to fix this issue?

And you would be right. It is so important that one company has fixed it – only that group is not Apple, it is Google’s Android division.4  Google’s newest phone is The Pixel, and it has built in technology that screens out unwanted robo-calls and spammers.5  (Their latest tablet is pretty sweet also). Unless Apple can get its act together, that is likely to be my next phone — and perhaps millions of other soon to be former iPhone users as well.

Also noteworthy: Amazon, a company that has not bought back stock in a long while. I would not go so far as others have, suggesting this is the secret of their success, but it is noteworthy that they are decidedly not stock re-purchasers. Perhaps its mere coincidence, but they also have become the most innovative company in the world.

More on this entire topic later today tomorrow.

 

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1. In other eras, the buybacks I like to poke fun at include Citigroup (pre-financial crisis), buying $22 billion from 2003-07 at much higher prices than where it ended up.

But Dell may be the poster child for abusive buybacks. The company actually  spent more money on share buybacks than the firm earned in profits – ever. It was an immense wealth-transfer of 10s of billions of dollars from investors in Dell to the founder Michael Dell and other insiders.

2. GM did offer buyout packages to 18,000 salaried workers in North America last month at a cost of a few billion dollars.

3. In the third quarter, Apple sold $29.9 billion dollars of iPhones out of $53.3 billion of total revenue.

4. Google does buy back stock, but at a most lower rate than Apple – about $8 billion in 2018.

5. It also has the best camera on the market: “Apple can no longer claim to have the best camera on a phone. Google gets to say that. If my illustrated love poems to the Pixel camera haven’t been enough to convince you, check out what The Wall Street Journal and The New York Times have had to say about the first two Pixel generations.” –Verge

 

 

Previously:
Stock Buybacks

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