Think Buybacks Boost Share Prices? Think Again

Baidu Inc BIDU made headlines on Thursday by announcing a new $1 billion share buyback program. The stock surged more that 3 percent following the announcement, as shareholders viewed the move as a sign of confidence on behalf of management.

Buyback Frenzy

Baidu is not the only company that has demonstrated a willingness to repurchase shares of stock lately, particularly in the current historically-low interest rate environment.

According to a recent report by Janus Capital, companies are on pace to spend $1.02 trillion on buybacks in 2015, 18 percent more than they spent in any year prior to the Financial Crisis.

Why Buybacks?

Buybacks are typically seen as good news for shareholders. In addition to demonstrating management confidence, shares that are bought in the public market provide bid support for a stock. A reduction of the number of shares in the market shifts the supply/demand balance more toward the demand side, which should theoretically drive share prices higher.

Theory Vs Reality

Do these theoretically advantages of large share buybacks actually make a significant difference on share price in the long-term?

According to USA Today, there were exactly 15 companies in the S&P 500 that reduced their number of shares outstanding by 10 percent or more in 2014 via buybacks.

Benzinga took a look at how the stocks of those 15 companies have performed so far in 2015.

Starwood Hotels & Resorts Worldwide Inc HOT

• 2014 shares outstanding reduction: 10.0 percent
• 2015 share price performance: +3.3 percent

Weyerhaeuser Co WY

• 2014 shares outstanding reduction: 10.1 percent
• 2015 share price performance: -14.1 percent

Illinois Tool Works Inc ITW

• 2014 shares outstanding reduction: 10.9 percent
• 2015 share price performance: -4.7 percent

LyondellBasell Industries NV LYB

• 2014 shares outstanding reduction: 11.3 percent
• 2015 share price performance: +19.0 percent

VeriSign Inc VRSN

• 2014 shares outstanding reduction: 11.4 percent
• 2015 share price performance: +23.8 percent

Urban Outfitters Inc URBN

• 2014 shares outstanding reduction: 11.4 percent
• 2015 share price performance: -4.1 percent

Cameron International Corp CAM

• 2014 shares outstanding reduction: 11.9 percent
• 2015 share price performance: +2.1 percent

Hess Corp HES

• 2014 shares outstanding reduction: 12.3 percent
• 2015 share price performance: -18.1 percent

Citrix Systems Inc CTXS

• 2014 shares outstanding reduction: 12.3 percent
• 2015 share price performance: +18.0 percent

Bed Bath & Beyond Inc BBBY

• 2014 shares outstanding reduction: 12.9 percent
• 2015 share price performance: -14.7 percent

CF Industries Holdings Inc CF

• 2014 shares outstanding reduction: 13.5 percent
• 2015 share price performance: +9.8 percent

Motorola Solutions Inc MSI

• 2014 shares outstanding reduction: 13.6 percent
• 2015 share price performance: -10.2 percent

The Mosaic Co MOS

• 2014 shares outstanding reduction: 13.7 percent
• 2015 share price performance: -5.4 percent

CBS Corp CBS

• 2014 shares outstanding reduction: 14.9 percent
• 2015 share price performance: -4.5 percent

Juniper Networks Inc JNPR

• 2014 shares outstanding reduction: 16.0 percent
• 2015 share price performance: +24.1 percent

The Results

Although the sample size is relatively small, a look at these big buyback spenders yields a surprising result: despite the repurchases, the average returns of these 15 stocks in 2015 is just +1.6 percent.

These stocks have actually lagged the +2.4 percent overall return of the S&P 500 in 2015, and more than half (53 percent) of the stocks have generated negative returns so far this year.

Takeaway

While the benefits of share buybacks are clear, it takes more than a share repurchase program to drive share prices higher in this high-growth environment.

Repurchase announcements like the one that Baidu made this week are certainly no guarantee that the company’s stock will be making any significant gains in the near future.