The Hard Truth About Stock Buybacks
Corporate stock buybacks are one of the many ways that businesses use financial engineering to manipulate stock price. The hard truth is that those boosted per share metrics come at a major cost.
When a company initiates a corporate buyback that isn’t free money, they are spending leftover cash to buy back those shares. Although your share of the company’s earnings or cash flow is higher your share now comes with less liquid assets(like cash).
What truly matters when analyzing a buyback is whether the stock was trading above, at, or below its intrinsic value. This is because if a stock is truly trading below, its intrinsic value  then the negative toll on the company’s cash is disproportionately lower than the boost that comes from the higher per share metrics(earnings, fcf, etc). The obverse holds true for when a company is buying back shares trading above their intrinsic value as the negative toll on the companies cash is disproportionately higher than the boost in per share metrics it creates.
Let’s use a real world example here:
Note: for this example, we will be using an intrinsic value of $115 per share for Zoetis (this utilizes baseline calculations for future cash flows, and is slightly conservative compared to Wall Street estimates).
In quarter one, Zoetis spent roughly 606 million buying back shares at a price of $126 .25 per share. That $11.25 gap between intrinsic value and the share price is value destroyed for shareholders. Doing the math that 606 million destroyed around 54 million in shareholder value (or roughly $.13 per share).
Zoetis plans to spend another 1.8 billion on buybacks this year. They have not yet stated a price, but if we assume that they spend 1 billion buying back shares at $75 per share than that $40 gap between intrinsic value and the share price is value created for shareholders. Doing the math that 1 billion would equate to roughly 533 million in value created for shareholders (or roughly $1.27 per share).
Don’t let buybacks and per share metrics fool you. The added growth it provides you is but a Miage that comes out of your cash.
