Do Misdirected Corporate Stock Repurchase Motives Lead to Poor Stock Repurchase Plan Results? National Semiconductor Case Study

Abstract

National Semiconductor states that its stock repurchase program’s goal is to contribute to increasing the firm’s return on invested capital for the benefit of shareholders and employees. Which measure of return on capital is National watching? A review of four return on capital ratios suggest most provide little or no guidance on the appropriate timing for buybacks, nor, in general, do they provide a good gauge of a buyback program’s success. We observe that, in a survey of 275 corporations with current equity market capitalization of about $1.0 trillion who executed $350 billion of buybacks during the past decade, the “raw performance” (impact on stock price) of National Semiconductor’s buyback program recently ranked 264th best. From FY00 through FY10, National paid $5.066 billion to repurchase 231.5 million shares at about $21.89 apiece. Now trading at about $13.75, those buybacks amount to a 37.2% loss ($1.883 billion) on the amount invested before consideration of foregone interest income. Absent those buybacks, National’s stock price would now be trading more than 57.2% higher. The poor raw performance of National’s stock repurchase program may be temporary. Indeed, given the company’s high margins and earnings, it seems possible National is now undervalued. If so, the reported raw performance of its buybacks will improve. Still, the only economic justification for a stock repurchase program is that the repurchased shares are undervalued. The key question is, does the poor raw performance of National’s stock repurchase program result from National’s misspecification of a reasonable economic objective? Did aiming to increase reported return on capital rather than to repurchase undervalued shares hurt National’s buyback performance? More generally, whether or not National’s stock price rebounds and its buyback performance statistics improve, do companies as a group run less effective programs when they cite “improve return on capital”, or “offset options dilution”, or “reduce excess cash” as motivating buybacks rather than a goal to “repurchase undervalued shares”? A review of National Semiconductor’s stated buyback objectives and its program’s results certainly raises this question, but a definitive answer must await a more extensive study.