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Kaminsky's Call: Why Buybacks Traditionally Don't Work

As we discussed on The Strategy Session yesterday, investors and analysts alike are enthusiastic whenever they hear of a new stock buyback.

Hewlett-Packard's headquarters in Palo Alto, California.
AP
Hewlett-Packard's headquarters in Palo Alto, California.

The big one this month is Hewlett-Packard and their $10 billion plan to spend cash in this manner.

If you go by history, this is a bad move. My "Call-to-Action" is directed towards (HPQ) holders and those considering the stock; know that buybacks traditionally don't work and act accordingly.

There are so many ways a company can deploy cash whether it be to grow their business organically, hire more people, or pay back in dividends and distributions.

What value have buybacks given investors? We looked at three poor performers on the show yesterday.

Microsoft's $40 billion, Intel's $25 billion, and, most notoriously, AT&T's $15 billion buybacks gave back no value to investors. The first two took years to get back to levels where the buyback was announced. AT&T's was nothing short of a disaster as the stock did nothing but plunge after a very short-lived initial boost.

What is the reason for these failures?

Companies, for the most part, have terrible sense of timing when and, strategically, why they announce buybacks. Imagine if tech, media, and telecom companies had just bought Apple stock instead. The results would be otherworldly compared to the mediocre-to-poor performances we just evaluated.

If I owned a stock in a company, I would rather see cash given back in the form of distributions. Put the capital in the hands of the investors.

Hewlett-Packard is trying in various ways to compensate for the Mark Hurd debacle. This is not one of the right ones. Be wary of this buyback's chances for success.


Programming note: "The Strategy Session," hosted by David Faber and Gary Kaminsky, airs weekdays at Noon ET on CNBC.

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Gary Kaminsky does not hold any equity positions.

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