In several notes to clients this month, Odeon Capital Group analyst Dick Bove has pointed out that Bank of America’s big spending on stock buybacks over the past five years has been a waste for its shareholders, with the bank’s stock price declining slightly during that period.
The idea behind repurchasing shares on the open market is that they reduce a company’s share count and therefore boost earnings per share and support higher share prices over time. This doesn’t seem to be a bad idea, especially for a company such as Apple Inc.
AAPL,
which has generated excess capital and has appeared to be firing on all cylinders for a long time. For a company that is continuing to expand its product and service offerings while maintaining high profitability, buybacks can be a blessing to shareholders.
But for banks, for which capital is the main ingredient of earnings power, a more careful approach might be in order. The data below show how buybacks haven’t helped the largest banks outperform the broad stock market over the past five years. And now, banks face the prospect of regulators raising their capital requirements by 20%, according to a Wall Street Journal report.
Before showing data for the 20 companies among the S&P 500 that have spent the most money on buybacks over the past five years, let’s take a look at how share repurchases are described in a misleading way by corporate executives — and by many analysts, for that matter. During Bank of America’s
BAC,
first-quarter earnings call on April 18, Chief Financial Officer Alastair Borthwick said the bank had “returned $12 billion in capital to shareholders” over the previous 12 months, according to a transcript provided by FactSet.
Borthwick was referring to buybacks and dividends combined. Neither item was a return of capital. In fact, Bove summed up the buybacks elegantly in a client note on June 9: “The money that the company uses to buy back the stock is simply given away to people who do not want to own the bank’s stock.”
It is also worth pointing out that the term “return of capital” actually means the return of investors’ own capital to them, which is commonly done by closed-end mutual funds, business-development companies and some real-estate investment trusts, for various reasons. Those distributions aren’t taxed and they lower an investor’s cost basis.
Dividends aren’t a return of capital, either, if they are sourced from a company’s earnings, as they have been for Bank of America.
One more thing for investors to think about is that large companies typically award newly issued shares to executives as part of their compensation. This dilutes the ownership stakes of nonexecutive shareholders. So some of the buybacks merely mitigate this dilution. An investor hopes to see the buybacks lower the share count, but there are some instances in which the count still increases.
How buybacks can hurt banks
Banks’ management teams and boards of directors have engaged in buybacks because they wish to boost earnings per share and returns on equity by shedding excess capital. But Bove made another industry-specific point in his June 9 note: “If the bank buys back stock it must sell assets that offer a return to do so; it lowers current earnings.” Buybacks can also hurt future earnings. Less capital can slow expansion, loan growth and profits.
According to Bove, Bank of America CEO Brian Moynihan, who took the top slot in 2010 and saw the bank through the difficult aftermath of its acquisition of Countrywide and Merrill Lynch in 2008, “is one of the brightest, most capable executives for operating a banking enterprise.”
But he questions Moynihan’s ability to manage the bank’s balance sheet. Bove expects that Bank of America will need to issue new common shares, in part because rising interest rates have reduced the value of its bond investments.
In a June 5 note, Bove wrote: “Mr. Moynihan indicated twice [during a recent presentation] that the bank has excess cash that apparently could not be invested profitably. Possibly he is unaware that the cost of deposits at the bank in [the first quarter of] 2023 was 1.38% while the yield in the Fed Funds market can be as high as 5.25%.” In other words, the bank could earn a high spread at little risk with overnight deposits with the Federal Reserve.
That is a very simple example, but if Bank of America had grown its loan book more quickly over recent years while focusing less on buybacks, it might not face the prospect of a near-term capital raise, which would dilute current shareholders’ stakes in the company and reduce earnings per share.
Top 20 companies by dollars spent on buybacks
To look beyond banking, we sorted companies in the S&P 500
SPX,
by total dollars spent on buybacks over the past five years (the past 40 reported fiscal quarters) through June 9, using data suppled by FactSet. It turns out 11 have seen prices increase more quickly than the index. With reinvested dividends, 12 have outperformed the index.
| Company | Ticker | Dollars spent on buybacks over the past 5 years ($Bil) | 5-year price change | 5-year total return with dividends reinvested |
| Apple Inc. |
AAPL, | $393.6 | 279% | 297% |
| Alphabet Inc. Class A |
GOOGL, | $180.6 | 116% | 116% |
| Microsoft Corporation |
MSFT, | $121.5 | 221% | 239% |
| Meta Platforms Inc. |
META, | $103.4 | 42% | 42% |
| Oracle Corp. |
ORCL, | $102.6 | 140% | 161% |
| Bank of America Corp. |
BAC, | $93.6 | -2% | 10% |
| JPMorgan Chase & Co. |
JPM, | $87.3 | 27% | 47% |
| Wells Fargo & Co. |
WFC, | $84.0 | -24% | -13% |
| Berkshire Hathaway Inc. Class B |
BRK.B, | $70.3 | 70% | 70% |
| Citigroup Inc. |
C, | $51.4 | -29% | -16% |
| Charter Communications Inc. Class A |
CHTR, | $48.5 | 20% | 20% |
| Cisco Systems Inc. |
CSCO, | $46.5 | 15% | 34% |
| Visa Inc. Class A |
V, | $45.6 | 66% | 72% |
| Procter & Gamble Co. |
PG, | $42.1 | 89% | 116% |
| Home Depot Inc. |
HD, | $41.0 | 51% | 71% |
| Lowe’s Cos. Inc. |
LOW, | $40.8 | 111% | 131% |
| Intel Corp. |
INTC, | $39.0 | -40% | -31% |
| Morgan Stanley |
MS, | $36.7 | 67% | 93% |
| Walmart Inc. |
WMT, | $35.6 | 82% | 99% |
| Qualcomm Inc. |
QCOM, | $35.1 | 101% | 130% |
| S&P 500 |
SPX, | 55% | 69% | |
| Source: FactSet | ||||
Click on the tickers for more about each company or index.
Click here for Tomi Kilgore’s detailed guide to the wealth of information available for free on the MarketWatch quote page.
The four listed companies with negative five-year returns are three banks — Citigroup Inc.
C,
Wells Fargo & Co.
WFC,
and Bank of America — and Intel Inc.
INTC,
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