US: Share buyback schemes ineffective - analyst
The study found few advantages for investors
Share repurchasing programmes by leading soft drinks firms such as PepsiCo, The Coca-Cola Co and Dr Pepper Snapple Group are ineffective because companies buy back shares at inflated prices, an analyst has warned.
In a study of 12 US food and beverage companies last month, Sanford Bernstein found that the groups have spent an annual average of 3.5% of their market capitalisation on share repurchases since 2005. Coca-Cola Enterprises (CCE) repurchased 7.5% of its total worth in 2012, the study said.
However, the report added: “Despite the large amounts of buybacks of companies historically, many of them have seen an only relatively small dent in their share counts over the years.”
Bernstein said that only one company in the study - Colgate-Palmolive - bought back stock at “relatively attractive valuations”.
“We encourage investors to be somewhat sceptical of an investment thesis based largely on buybacks, given their general ineffectiveness over the longer term,” the study said, adding that CCE is one of the companies whose stock has benefited most from investors hoping for returns from buyback schemes.
Bernstein blamed shares issuances for the low returns, with companies on average issuing more than half of their share count reduction to cover programs such as employee compensation.
In October, analysts Stifel Nicolaus said CCE's ongoing repurchase programme could be used as a leverage for new M&A.
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