Share repurchases have become so routine that when companies don’t buy back "enough" stock, the investment community often reacts with disappointment. While there are valid (and sometimes concerning) fundamental reasons for holding off, in this post, I want to highlight some non-fundamental factors that might explain a slower-than-expected buyback pace.
Let's get right into some of these reasons.
1. Limited Liquidity: Sometimes companies authorize such large buyback programs that absorbing the full amount without affecting the stock price becomes challenging. I have seen this happen often. For instance, a company might announce a $100 million buyback after a sharp stock decline, which excites investors. But if the stock trades only $700,000 a day on an average, executing the buyback without moving the price could take months or even years.
2. Regulatory Restrictions: In some markets, regulators impose limits on the amount a company can repurchase -- say, no more than 25% of average daily volume. The result is similar to the liquidity issue above: even with the intent and cash to buy back shares, the pace is capped by rules outside the company's control.
3. Counterparty-Driven Delays (Especially with ASRs): With accelerated share repurchase (ASR) programs, companies often work with investment banks to execute large buybacks quickly. But the bank might short the stock initially and unwind takes time. This dynamic sometimes lead companies to slow their buybacks to accommodate the counterparty.
4. Signaling Effects and Company's Reputation: For companies known to be shareholder-friendly, simply announcing a buyback can lift the stock price. Ironically, this immediate bump might reduce the company’s ability to repurchase as many shares as intended — higher prices make buybacks less attractive or more expensive.
While it’s tempting to assume a company is falling short when buybacks don’t meet expectations, there are often practical constraints at play. As Mark Twain wisely put it: “It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so.”
Abhay Srivastava is the Founder and Managing Member of AS Investment Partners LLC, a value investing firm (www.asinvpartners.com).
