Why Wal-Mart’s $15 billion stock buyback may not be as great as it seems

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:

1. Bad timing. Buybacks make the most sense when stocks are cheap. But most CEOs always think their stock is cheap–and in the aggregate, buybacks tend to track the S&P 500 price level. When prices are up, so are buybacks.
2. Big leverage. Conventional wisdom says companies buy back shares with excess cash. Instead, buybacks closely track borrowing among non-financial companies in the S&P 500. Money is fungible, so that amounts to buying shares with debt, cranking up the risk in the process. That resulting stock boost “can come back to haunt a firm when the economy enters a downswing” and they’re saddled with debt, Lapthorne writes.
3. Poor investment. Buying back shares could come at the expense of smart reinvestment in the business. Reinvestment provides a better return, Lapthorne says, citing a 2000 study concluding that, “in the long term, companies created more value with a strategy of not repurchasing shares.”
4. Inside advantage. By using share purchases instead of boosting dividends, managers can protect the value of their stock options, which tend to fall based on expected dividend payments.
5. Less is more. The nature of a stock buyback means that smart ones could signal a stagnant share price. A company repurchasing shares gets more bang for its buck if the share price stays low until the buyback is done. Good for the company and long-term shareholders, but it could unsettle others—or even prompt less sophisticated investors to give up and sell.
6. Earnings manipulation. A 2006 study concluded that companies appear to stifle performance ahead of a buyback, accounting for at least some of the subsequent improvement in operating and stock-market results.
7. Unexpected results. Buybacks are supposed to reduce share counts, but another study shows most companies subsequently issued more new shares than they bought back.

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.