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Forum Report:
Requested new program and
workshop for “metrics”
Measuring
Comparative Results of Buybacks and Reinvestment
While
questions about the best way to measure “Returns on Corporate Capital” (“ROCC”)
continue to engage the experts participating in the Forum’s workshop for
“metrics,”[1] we have been making good
progress in developing a simple analytical model that can be broadly used
to compare the results of buybacks with a company’s reinvestment of
capital in its production of goods and services.
Observations
of some of the workshop participants have encouraged our analysis of
buybacks as measured not only by earnings per share, but also by total
corporate earnings and stockholders’ equity. This will allow us to address
the interests of investors who focus on current market pricing of
securities as well as on the interests of value investors and others
concerned with capital commitments based on the long term intrinsic value
of a corporate enterprise.
A test
version of a very basic analytical tool pictured below has been posted on
a “Buyback
Analysis”
page of the Forum’s workshop website for your review:
You will see
that the website tool allows inputs of assumptions in shaded cells for key
variables that may be relevant to a preliminary review of a buyback
proposal. It should be emphasized, though, that this very simple analysis
is intended only for an initial assessment and is not a substitute for the
more rigorous analyses required for professional corporate finance and
securities valuation purposes.
Your advice
regarding foundations for assumptions will also be appreciated. As
indicated in a note on the Buyback Analysis website, the Forum’s
Returns on
Corporate Capital (“ROCC”)
resource can serve as a source of specific corporate and industry data for
this purpose. The ROCC report’s five year average rate of return for a
company’s industry, for example, could be used as the input assumption in
the Buyback Analysis for reinvestment rate of return to establish a
threshold “mediocrity standard” justifying management’s continuing
responsibility for corporate capital, since any projections of long term
returns below that industry average would presumably suggest board duties
to either replace management or liquidate – possibly by means of stock
buybacks, of course.
Thanks are
owed to all the workshop participants who helped to develop this
analytical model, and especially to Robert L. Colby of
Corequity
for his brilliantly simple observation that each dollar used for a buyback
produces a one-time increase in the proportion of earnings allocated to
each outstanding share, while the dollar used in production generates
compounding increases in capital for reinvestment.[2]
GL –
August 11, 2016
Gary Lutin
Chairman,
The Shareholder Forum
575 Madison
Avenue, New York, New York 10022
Tel:
212-605-0335
Email:
gl@shareholderforum.com
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