Insiders run off the market
During the last decade we have experienced many market manipulations in order to inflate share prices of mostly large companies. One of these suspicious activities are buybacks which volume rises year by year, starting from 2009. Within last 12 months the so called share repurchases reached their all time high. The reason behind that was mainly due to the corporate tax reform where corporate tax and tax on foreign income were decreased significantly.
It is worth recalling that the buyback is the process where a company buys its own outstanding shares to reduce the number of shares available on the market. After repurchase, the shares are usually canceled. According to the companies’ quarterly filings, in the first 3 quarters of 2018, S&P 500 companies bought back shares amounting to 583,4 billion dollars, giving 52,6% growth in compare to the same period in 2017. As a result of that process the number of shares in turnover decreased at least by 4% in 18% of S&P 500 companies (which also inflated prices of those shares). In 2019, buybacks are expected to reach roughly 770-800 billion dollars.
This process has a huge influence on stock prices which is clearly showed on the graph below. Red line represents S&P 500 index, blue and green bars represent buybacks and dividends of S&P 500 companies, respectively. This chart illustrates strong correlation between S&P 500 and buybacks, beginning from 2003.
In the recent years the most active in buybacks were tech companies. During the first 3 quarters of 2018, companies known for having the largest amount of cash (Apple, Alphabet, Microsoft, Oracle and Cisco) burned more than 115 billion dollars which is almost 20% of all US buybacks. Furthermore, the pace of share repurchasing is expected to increase in 2019 to as much as 940 billion dollars, which would be a 22% growth relative to 2018.
Apple as clear example of wasting capital
Apple is known as the most aggresive purchaser of its own shares. It is even more evident since the US corporate tax reform came into play. In first 3 quarters of 2018 they spent 62,9 billion dollars for share repurchases averagely quoted 222,07 dollars, near the peak. Now, when we write this article the stock price of Apple is around 155 dollars, which gives more than 10 billion completely wasted dollars on buybacks.
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This irrational activitivty seems to be impossible to explain but this is not a coincidence. Within many US companies it is well known behaviour in order to help Insiders get rid of overvalued stocks. They first initiate extremely huge buybacks in order to inflate the share price and in the meantime they sell their own shares on premium. It hasn’t to be mentioned how much it adversely affects on shareholders and companies in the long run.
The above graph explains insider moves of Apple during the last 3 years. It is clearly showed that no one of Apple employees bought companies’ shares, they rather massively sell them. Good example is CEO of Apple Tim Cook, who received a bonus of 560 thousands Apple shares. After a few days of receiving them he sold them all getting 121,5 million dollars.
As we mentioned before, many companies act in that way, here we have more examples:
1. Apple in the second and third quarter of 2018 bought back shares worth 41.3 billion dollars. During this time, insiders sold shares worth 199 million dollars.
2. Oracle in the second and third quarter of 2018, bought back shares worth 15.3 billion dollars. During this time, insiders sold shares worth 128 million dollars.
3. The UnitedHealth Group in the second and third quarter of 2018 bought back shares worth 3.7 billion dollars. During this time, insiders sold shares worth 44.5 million dollars.
It is worth noting that these huge amounts of money reached only narrow group of people, the so called high level management of the companies.
Sad truth about buybacks
Despite of the highly overvalued stock prices, insiders still use buybacks. Sometimes this happens due to availability of the cheap credit, which is later used for share repurchases instead of using cash. Herbalife is a great example. The company was issuing debt in order to buy back their shares which almost resulted in a bankruptcy.
Of course, insiders’ motives to do that are strong. Insiders remunerations are linked to the share prices, so when the prices go up they are happy. However, when the share price is falling, management is not opting for buybacks anymore. In this case, no one wants to explain before the CEO why did he risk companies’ money for buying back shares when the price could fall more instead of investing in research and development or mergers and acquisitions.
In reality, in order to care about shareholders and to keep sustainable long term growth, they should not trigger buybacks after a few years of price improvement. They should do that after significant drop in price, and in the best case 1,5 years since the beginning of the bear market. Unfortunately, this is usually not the case. Greed and the lust for money is always directing investors’ and management behaviour which is adversely affecting companies in the long term. The example below perfectly shows this.
LOT MORE,,,,,,,,,,,,,,,,,,,,,,,
http://www.investmentwatchblog.com/insiders-buybacks/
Realist - Everybody in America is soft, and hates conflict. The cure for this, both in politics and social life, is the same -- hardihood. Give them raw truth.
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