The issue of share buybacks is a hot topic among many investors today. It’s even become a political issue, with prominent politicians crusading against evil corporations using tax-cut windfalls to buy their shares back, instead of hiring more workers. I view this political grandstanding as nothing more than American populism. Management’s task is to provide ROI for a company’s owners (shareholders), not create unnecessary jobs.
That’s not to say that I think all share buybacks are great ideas. Whenever I see one, I always ask myself why management couldn’t find anything more creative to do with the money. If they have cash to spare, why not invest in new products, better equipment—and yes, upgrading their relationships with employees.
I understand why it may seem to some that senior management of companies who get a large part of their compensation in shares and options are spending company finds to boost their own pay.
But even if this were so, shareholders may also benefit from the higher share prices share buybacks can create. If a company’s stock is way oversold, it could hamper its ability to raise funds, threaten its listing status, or create other problems that would hurt shareholders.
There may also be times when management and shareholders sincerely believe their company is undervalued. In such a case, I can certainly see a share buyback making sense.
Warren Buffett says share buybacks are really just a different way of paying a dividend.
That said, when it comes to the resource sector, I’ve never seen a case when I thought a share buyback was a good idea.
There’s an important difference between a mine or an oilfield vs. a factory, a restaurant, or a law practice: resource extraction is a self-depleting business.
There’s no such thing as a mine that can go forever. (Geothermal and renewable energy doesn’t count; those are not extractive businesses.) In contrast, the supply of clients for a factory, restaurant, or law practice could last as long as our species does.
No matter how great a deposit one mines (pumps, etc.), it is finite. Every ounce, pound, or barrel extracted is one less until it runs out.
That’s why it’s called Life of Mine (LOM) in feasibility studies: like people, all mines are born under a death sentence… unless you extend the operation’s life.
But that requires continuous exploration, development, and construction of new mines, oilfields, etc. And that costs a lot of money. It’s that or buying assets from others who have spent money exploring, developing, and building new mines, oilfields, etc.
Either way, you have to spend tons (or tonnes) of money, or you mine yourself out of business.
That’s why I’ve never seen a resource company share buyback I liked—even what I agreed that the stock was ridiculously oversold.
Given that they all operate under a death sentence, how could management fail to find a single thing better to do with the cash than buy back shares?
Isn’t there any new equipment they could buy that would lower operating costs?
Aren’t there any exploration projects or newly defined deposits they could buy?
Aren’t there any geologists they could hire to go out and look for fresh discoveries?
Or couldn’t they invest in R&D to develop new techniques that would—gasp!—revolutionize the exploration, extraction, or processing businesses? (Now there’s an idea I’d like the see the big boys get behind.)
And if share prices are down because commodity prices are down, that’s all the more reason to invest in cutting costs and boosting efficiency. Far better than to squander the treasury buying shares in a company with shrinking margins—even if that’s one’s own company.
None of this seems to occur to management when share prices are down and shareholders are threatening their jobs.
To be fair, that may be the real reason for share buybacks—at least as much as management’s desire to realize value from their options.
This brings us to a key point: we, as shareholders, have to ask ourselves if we are part of the problem.
Do we get on the phone and scream at management when share prices are falling?
Or do we ask them what they are doing to improve the business?
We do have a say on this matter. We can express our objections to share buyback plans when we see them. Ultimately, as owners of these businesses, we can hold management accountable at annual general meetings of shareholders. We can even organize such efforts, if we alone are not individually major shareholders management has to pay much attention to.
That’s my take,
