For those of you who were not already disillusioned enough after reading my earlier post this week entitled Don’t Trust Stock Research, I stumbled upon another article from the New York Times that should push you over the edge. The article details the stock buyback program initiated by LPL Financial Holdings (LPLA) at the urging of an activist hedge fund, Marcato Capital.
This quote from the Times article should give you the picture of how well the buyback program served its investors:
But not all buybacks are created equal, and exhibit A is LPL Financial Holdings, a brokerage and investment advisory firm in Boston. LPL recently completed a $275 million stock buyback spree that was exceedingly costly, increased the company’s debt and wound up primarily benefiting a powerful insider investor.
It turns out that the points brought up by the Times are all those which I mentioned as being common, yet often unacknowledged problems with stock buyback programs in a video I made last year. Namely:
- Company managers don’t time stock purchases very well,
- Buybacks end up increasing balance sheet leverage, and
- Buybacks often serve to obfuscate a practice of backdoor compensation for insiders
Here’s the video (8 minutes):
In our Valuation Master Class, we go into detail about how to estimate the cash effect of stock buybacks on the owners of a firm. It’s a topic rarely discussed in investing circles, but an important one nonetheless.
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