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Companies are repurchasing shares at levels not seen since before the financial crisis, but most buybacks don’t pay off for shareholders, says a new report from Thomson Reuters.
“We found that surprisingly few companies were able to repurchase shares at lower prices as well as see future price appreciation within the following 12 months,” says the report.
With cash at record levels, stock buybacks are an increasingly popular way to use free cash flow.
Investors often equate buybacks with management’s belief that the company is undervalued by the market, and purchases can significantly affect the performance of a company stock if the timing is right. But Thomson Reuters’ data shows that’s not always the case.
According to the report, out of 380 companies in the S&P 500 that repurchased shares in at least five of the quarters, 84 companies bought shares when the stock price was high, and only 60 firms were able to buy low.
In addition, 72 companies saw poor returns within a year following share repurchases, versus 57 that saw good results.
The findings point to a combination of bad market timing as well as policies that increase buybacks when companies have more free cash flow.
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