Back To Buybacks: Is It More About Dilution Than Concentration?
We mentioned previously in this series that buybacks may not capture everything (or even the most important things) when it comes to the question of whether companies should be concentrating (by taking shares off the market) shareholder ownership or diluting (putting new shares on the market). Buybacks reduce that down to a binary choice. Either shares are being subtracted, or they aren’t. In reality, sometimes shares are being subtracted; sometimes there is no change in the number of shares outstanding; sometimes shares are being diluted a little; and sometimes shares are being diluted a lot.
We broke those scenarios down into five buckets (also known as “quintiles”, i.e., fifths).
Source: FactSet, Vident, Bowyer Research, 12/31/90 – 12/31/19
What we see here is that the added value of being a diluter of company ownership versus a concentrator is not consistent across buckets. It’s not as though each bucket from ‘worst’ (top fifth, most dilutive) to the second worst to the third worst, etc. each keeping giving better returns. For example, the “best” bucket, labeled “Quintile 5” (meaning the times when companies are mostly buying back their stocks, concentrating rather than diluting), actually performs a bit less well than the second “best” bucket. This is what analysts would call a non-linear relationship, which is simply to say that the relationship between market dilution/concentration to subsequent calendar year performance does not act like a straight line, in which more concentration is uniformly better and more dilution is uniformly worse.
That’s why this scatter chart, which compares concentration/dilution (from left to right) to subsequent one-year performance (from top to bottom) doesn’t really show a very clear pattern. The line slopes down, which means that more dilution tends to be worse, but the pattern is not very clear to the eye because the correlation is not very strong.
Source: FactSet, Vident, Bowyer Research, 12/31/90 – 12/31/19
What we see instead is that almost all of the benefit of this metric to hypothetical past investors is found in whether or not the company is in the “worst” 20% or not. Times when a given company in a given year is diluting their shares — more than the other 80% of companies — see significantly worse (about 2.5%) performance than companies which are in the next bucket (that is more dilutive than the bottom 60%, but less dilutive than the top 20%). Further down there is no consistent pattern. What matters most in this particular analysis is whether a company is engaging in high rates of dilution or not.
Originally published on Townhall Finance.
Jerry Bowyer is a Forbes contributor, contributing editor of AffluentInvestor.com, and Senior Fellow in Business Economics at The Center for Cultural Leadership.
Jerry has compiled an impressive record as a leading thinker in finance and economics. He worked as an auditor and a tax consultant with Arthur Anderson, as Vice President of the Beechwood Company which is the family office associated with Federated Investors, and has consulted in various privatization efforts for Allegheny County, Pennsylvania. He founded the influential economic think tank, the Allegheny Institute, and has lectured extensively at universities, businesses and civic groups.
Jerry has been a member of three investment committees, among which is Benchmark Financial, Pittsburgh’s largest financial services firm. Jerry had been a regular commentator on Fox Business News and Fox News. He was formerly a CNBC Contributor, has guest-hosted “The Kudlow Report”, and has written for CNBC.com, National Review Online, and The Wall Street Journal, as well as many other publications. He is the author of The Bush Boom and more recently The Free Market Capitalist’s Survival Guide, published by HarperCollins. Jerry is the President of Bowyer Research.
Jerry consulted extensively with the Bush White House on matters pertaining to the recent economic crisis. He has been quoted in the New York Times, The Wall Street Journal, Forbes Magazine, The International Herald Tribune and various local newspapers. He has been a contributing editor of National Review Online, The New York Sun and Townhall Magazine. Jerry has hosted daily radio and TV programs and was one of the founding members of WQED’s On-Q Friday Roundtable. He has guest-hosted the Bill Bennett radio program as well as radio programs in Chicago, Dallas and Los Angeles.
Jerry is the former host of WorldView, a nationally syndicated Sunday-morning political talk show created on the model of Meet The Press. On WorldView, Jerry interviewed distinguished guests including the Vice President, Treasury Secretary, HUD Secretary, former Secretary of Sate Condoleezza Rice, former Presidential Advisor Carl Rove, former Attorney General Edwin Meese and publisher Steve Forbes.
Jerry has taught social ethics at Ottawa Theological Hall, public policy at Saint Vincent’s College, and guest lectured at Carnegie Mellon’s graduate Heinz School of Public Policy. In 1997 Jerry gave the commencement address at his alma mater, Robert Morris University. He was the youngest speaker in the history of the school, and the school received more requests for transcripts of Jerry’s speech than at any other time in its 120-year history.
Jerry lives in Pennsylvania with his wife, Susan, and the youngest three of their seven children.
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