Tuesday, March 13, 2012

Companies Do Not Successfully Time The Stock Market For Share Repurchases

From McKinsey Quarterly, "The savvy executive’s guide to buying back shares: Timing share repurchases is tricky. The most shareholder-friendly approach: don’t try." by Bin Jiang and Tim Koller [Annoying and intrusive free registration required to read whole article.]:
Markets are volatile and unpredictable, and what seem to be longer-term trends can quickly reverse course. Overconfidence can lead executives to buy back shares even at the peak share price—and a bias for caution can restrain them from buying shares when prices are lowest. The result is that companies seldom consistently pick the right time to buy back their shares at advantageous prices.
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companies should give up trying to time the market. Long-term shareholders will be better off if management would simply forecast total excess cash and evenly distribute it each calendar quarter as “dividends” in the form of share repurchases. CFOs can approach such regular buybacks in two ways. First, they can repurchase shares as excess cash becomes available. This is the easiest approach and the one least likely to send adverse signals to investors around the potential for excess cash or cash shortfalls. It is probably right for most companies, even if it generates lower returns.

Second, companies can evenly distribute similarly sized repurchases over time.

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