Over the past decade, companies especially US companies have been constantly conducting share repurchases. As we all know, in theory share repurchases is definitely a good thing as it shows that company’s management feels that current prices do not justify the true value of the company. Furthermore, share repurchases increases shareholder’s value as well given the decrease in outstanding shares. However, this might differ in practice. As investors we should always question ourselves if share repurchase is truly the ideal move by management.
Henry Singleton, C.E.O. of Teledyne is also known as the father of modern stock buyback. During the 1960s, he built up Teledyne largely through using his very high P/E shares of 20x to acquire a wide range of businesses trading at lower multiples of ~12x. Throughout the entire period of company acquisitions, nearly 130 were funded via stock deals. During the second phase of late 1969s when the P/E of his stock fell he began focusing on optimising company’s operations. Following this in the early 70s, when his company’s P/E was trading at single digits, he begun a series of share buybacks.
According to Buffett, if one took the top 100 business school graduates and made a composite of their triumphs, their record would not be as good as that of Singleton, who incidentally was trained as a scientist, not an MBA. The failure of business schools to study men like Singleton is a crime, he says. Instead, they insist on holding up as models executives cut from a McKinsey & Company cookie cutterMassif Capital’s Top Short Bets In The Real Asset Space [Exclisuve]