When Wal-Mart Stores does a thing, it does it big. The stock buy-back it announced at its annual meeting today is no exception, at $15 billion, hot on the heels of an earlier $15-billion repurchase plan.
So it’s probably a good time to remember that stock buybacks generally aren’t the unparalleled good that they can seem at first glance.
In theory, companies buy back shares when they’re cheap, boosting the share price for those who stay in the stock–and improving earnings per share, at least on its face. (The math is simple: If the company remains just as valuable as a whole, fewer shares mean each is worth more.)
Wal-Mart sales have been disappointing lately, with the retailer reporting a drop in same-store sales in the first quarter—the first dip since 2011. It also missed analyst expectations on revenue, which rose about 1% to $114 billion. Stock buybacks have helped keep Wal-Mart shares in line with indexes, bolstering their value and keeping their performance roughly in line with the broader market. The retailer has bought back $14 billion worth of stock in the last two years, including $6.2 billion so far this year.
But as Societe Generale analyst Andrew Lapthorne pointed out in a sweeping 20-page report last year, theory and reality only occasionally converge. Lapthorne and his team compiled an exhaustive review of research on buybacks, and warned that buybacks are generally poorly timed, often increase risk, stunt reinvestment, enrich insiders, could signal underperformance, obscure actual growth–and can even lead to more shares outstanding.
Here are seven ways that Lapthorpe says stock buybacks often disappoint:
We’ve contacted Wal-Mart for comment and will update this piece when we hear back.
Update: A Wal-Mart spokesman says the points in the Societe Generale report don’t apply to the retailer.
Wal-Mart has increased sales, profits and earnings-per-share 20 years running—the only company in the Dow 30 to do so—and the company’s share price is up about 17% over the last year, spokesman Randy Hargrove tells us. Meantime, the company has reinvested $68 billion of its cash-flow from operations over the last five years, paid out $23 billion in dividends and bought back $39 billion in shares.
“Virtually everything we do with our share-buyback program and with the performance of our company refutes what’s in that report,” Hargrove says.