Buyback Benefits to Shareholders (#1) - Texas Instruments Case Study

Abstract

Three performance measures of stock buybacks are discussed including 1) Return on repurchased stock, 2) Dividend equivalence, and 3) Value to shareholders. Return on repurchased stock is simple but misleading. A $10 stock may go to $15 after a buyback yet ongoing shareholders may receive no benefit from the buyback. Dividend equivalence measures whether a buyback beats a dividend. While taxes provide a modest advantage to shareholders from buybacks relative to dividends, most of the advantage attributed to buybacks in a dividend equivalence model is an artifact of the assumption that dividends are invested elsewhere (not in the stock). The most striking aspect of dividend equivalence analysis is its clear response to a separate question: Executive option holders receive an overwhelmingly large, relative benefit from buybacks. An absolute analysis of actual accretion provides a definitive measure of a buyback's contribution to shareholder wealth. In a case study, Texas Instruments (TI) spends $11.1 billion to repurchase 21.2% of its outstanding shares. The stock subsequently rises 24.9%. Absolute analysis shows ongoing TI shareholders benefit by $1.25 (3.6%) before tax considerations due to the direct effect of the buyback; managers benefit by up to $7.61 per option. Even for TI, a preeminent company, the small shareholder benefit, large gain for options, and sizable trading activity beg the questions: For corporate stock buybacks, should shareholder returns be reported, and do benefits adequately compensate for 10b-18, 10b5-1, insider trading and option compensation governance liabilities?