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Forum Report: Requested new program
Workshop for “Metrics” to Analyze Stock Buybacks
The
report of Forum plans for a program to analyze a stock buyback case
example[1] has stimulated discussions among
experts about what should be measured. Since professional interest in the
analytical issues that have been raised has justified unexpected levels of
attention, we are establishing a special “workshop” project to present
views of alternatives for your consideration.
The
current plan is to offer presentations of workshop members during the next
couple of weeks on the following two subjects, and to invite all Forum
participants to comment on their views. (According to standard Forum
policy, comments can of course be provided either anonymously or for
attribution, and for reporting either privately to the workshop member or
publicly to all Forum participants.)
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1. |
Comparing returns from capital used to repurchase stock with returns
from capital used to produce goods and services
– Most analyses of buyback programs focus on overly simple
calculations of only the immediate EPS result of an investment in
reducing the number of shares outstanding, compared with an
alternative rate of return from investment in the corporate enterprise
(addressed in #2, below). These calculations typically do not account
for the cumulative effects of capital that is invested in business
operations to generate future profits, which create more capital for
reinvestment.[2] |
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2. |
Basic measure of returns on corporate capital
– There have always been healthy debates among corporate finance and
investment professionals about the best way to measure returns on
investments in a business enterprise, but recent discussions have
revealed a surprising range of competing definitions.[3]
The Forum is of course committed to encouraging the consideration and
testing of different investor views, including these views relating to
returns, but we will necessarily have to settle upon a single
definition of performance measurement as a foundation for our
program’s consistent comparisons of buyback and corporate reinvestment
alternatives. |
It
should be understood that the workshop’s objectives will be limited to
developing definitions of these two basic measurements that all Forum
participants can use in their analyses of alternatives for the use of
corporate capital. To be reliable for our purposes, though, these
measurements must be consistent with the measurements used by a company’s
plant manager in a proposal for capital expenditures on new production
equipment, as well as with the broad range of analyses that may be
conducted to support the corporate board and investor decisions to
allocate that capital for the plant manager’s use in producing goods. The
scope of these more extensive applications has been summarized by Stephen
O’Byrne of Shareholder Value Associates in a presentation for discussion
of his professional views with other workshop members:[4]
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Operating performance measurement has two key objectives:
§
Increasing shareholder value, which means that performance measures
need to tie to discounted cash flow value.
§
Isolating
and rewarding management contribution to value, which means that
performance measures need to be decomposed into the component due to
management and the component due to industry factors. |
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Please let me know if you want to participate in this workshop project, or
if you have any suggestions of experts whose views should be invited. I
will in any event continue to welcome your questions and comments on these
or any other issues relating to the planned program, including suggestions
of case candidates to be considered when we resolve the analytical issues.
GL – May 9, 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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