Thumbs Down to Bristol-Myers Share Repurchase

I felt the need to do quick post on the news that Bristol-Myers Squibb’s (BMY) board approved a $3 billion share repurchase.
Ugh, these announcements make me groan. I loath share buybacks. After watching company after company waste billions of dollars buying their shares, I’ve come to the conclusion that these repurchases are a waste of time and money. I’d much rather see shareholders get more dividends.
In theory, it’s all the same money—share buyback or dividend—so it shouldn’t make a difference how shareholders are paid. The problem is that the stock market is far too volatile for investors to accurately see the results of a share repurchase.
Cisco (CSCO) is a prime example. The company has wasted several billion dollars buying back its stock. Would the stock have done worse without it? Probably, but I can’t say for certain. However, I absolutely know that shareholders would be wealthier with quarterly dividend checks.
Bristol-Myers is an excellent company and there’s a lot to like about the stock. They just had a very good earnings report. The company pays a quarterly dividend of 32 cents a share which translates to a yield of 5.1%. That’s about 150 points better than a 10-year Treasury.
Let’s look at some of the numbers: Bristol-Myers, like many other healthcare stocks, recently adjusted downward its 2010 earnings forecast due to Obamacare. They now see EPS coming in between $2.15 and $2.25. That means that the quarterly dividend of 32 cents (or $1.28 annualized) is very safe.
On top of that, Bristol-Myers is sitting on a mountain of cash. They have a net cash position of $3.4 billion which comes to $2.02 a share. This means they’re probably a bigger net lender than most banks. In short, they ain’t going bankrupt anytime soon. As a shareholder, wouldn’t it be so much nicer to get a check?
I actually get a little afraid when companies acquire too large a position in cash. This is what I like to call the “Bladder Theory of Corporate Finance.” Little mergers are fine, but mega-mergers are almost always trouble.
What’s most aggravating is that BMY’s board might be making the sensible move. If Congress doesn’t act soon, then dividend taxes are set to nearly triple for high-earners, rising from 15% now to 43.4% in 2013. President Obama wants dividends and capital gains to be taxed at the same level which would hopefully stem the tide of these silly share repurchases.

Posted by on May 5th, 2010 at 1:56 pm


The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.