Buyback Benefits to Shareholders (#1) - Texas Instruments Case Study
19 Pages Posted: 16 Jun 2007 Last revised: 23 Mar 2008
Date Written: June 12, 2007
Three performance measures of stock buybacks are discussed including 1) Return on repurchased stock, 2) Dividend equivalence, and 3) Value to shareholders.
Return on repurchased stock is simple but misleading. A $10 stock may go to $15 after a buyback yet ongoing shareholders may receive no benefit from the buyback.
Dividend equivalence measures whether a buyback beats a dividend. While taxes provide a modest advantage to shareholders from buybacks relative to dividends, most of the advantage attributed to buybacks in a dividend equivalence model is an artifact of the assumption that dividends are invested elsewhere (not in the stock). The most striking aspect of dividend equivalence analysis is its clear response to a separate question: Executive option holders receive an overwhelmingly large, relative benefit from buybacks.
An absolute analysis of actual accretion provides a definitive measure of a buyback's contribution to shareholder wealth. In a case study, Texas Instruments (TI) spends $11.1 billion to repurchase 21.2% of its outstanding shares. The stock subsequently rises 24.9%. Absolute analysis shows ongoing TI shareholders benefit by $1.25 (3.6%) before tax considerations due to the direct effect of the buyback; managers benefit by up to $7.61 per option. Even for TI, a preeminent company, the small shareholder benefit, large gain for options, and sizable trading activity beg the questions: For corporate stock buybacks, should shareholder returns be reported, and do benefits adequately compensate for 10b-18, 10b5-1, insider trading and option compensation governance liabilities?
Keywords: stock buyback, stock repurchase, share buyback, share repurchase, Texas Instruments, option compensation, management options, governance
JEL Classification: G3, G35, G30, G32
Suggested Citation: Suggested Citation
Register to save articles to
The Cashless Buyback(tm) - A Superior Alternative to 10b-18 Cash Buybacks - How CFOs Can Sell a $10 Stock for $24 as Soon as It Hits $16 (or Buy 15% of Their Company for Zero Cost) Risklessly - Antigravity Not Required